SAFE & Convertible Note Transactions
“A SAFE is four pages long. The damage from a bad one can take four years to unwind. Founders underestimate these instruments because they look simple—but simplicity in the document doesn’t mean simplicity in the outcome.” — John Montague
SAFEs and convertible notes are the workhorses of early-stage venture financing. They let founders raise capital quickly, without the cost and complexity of a full priced round. But the speed that makes them attractive is also what makes them dangerous when they’re not handled carefully. I’ve spent over 15 years working with technology companies on exactly these instruments—drafting them, negotiating them, and occasionally unwinding the ones that were put together without proper counsel.
At Montague Law, I represent both founders issuing SAFEs and convertible notes and investors deploying capital through them. Having worked on venture transactions at Locke Lord LLP (now Troutman Pepper Locke), a national AM Law 200 firm, I bring institutional-quality deal structuring to early-stage companies that are often told they don’t need a lawyer yet. They do.
How I Work with SAFEs and Convertible Notes
Drafting and customizing SAFEs. The Y Combinator post-money SAFE has become the default instrument for most seed-stage financings. It’s a well-designed form, but it’s not one-size-fits-all. I customize SAFEs to address specific deal dynamics: side letters for major investors, pro rata rights, MFN provisions, and valuation cap structures that reflect the actual negotiation between the parties. I also draft pre-money SAFEs when the deal calls for it—though founders need to understand the meaningful differences in dilution math between the two forms.
Convertible note drafting and negotiation. Convertible notes remain common, particularly for bridge financings and in deals where investors want the structural protections of a debt instrument—interest accrual, a maturity date, and a senior claim in the capital structure. I draft notes that clearly define conversion triggers, discount rates, valuation caps, and what happens at maturity if no qualified financing has occurred. Ambiguity in any of these terms creates disputes later.
Stacking analysis. Many founders raise on multiple SAFEs or notes before a priced round—sometimes at different valuation caps, with different investors, over different time periods. I model how these instruments interact at conversion. The math can surprise people: five SAFEs at three different caps, plus an option pool expansion, can result in founder dilution that nobody expected when each individual SAFE felt reasonable.
Conversion mechanics at Series A. The moment a priced round closes, every outstanding SAFE and convertible note converts into equity. The conversion mechanics—particularly for post-money SAFEs—are precise but not always intuitive. I ensure that founders understand exactly how many shares each instrument converts into, what the fully-diluted cap table looks like post-conversion, and whether the conversion terms align with the Series A term sheet.
Investor protections and information rights. Even in a SAFE or note deal, sophisticated investors may negotiate for additional protections: information rights, board observer rights, or pro rata rights in future rounds. I advise on what’s standard, what’s aggressive, and what terms a founder should push back on to preserve flexibility for the next raise.
Understanding the Instruments
Y Combinator introduced the SAFE in late 2013 as an alternative to convertible notes. The original form was a pre-money SAFE; in 2018, YC updated to the post-money SAFE, which fundamentally changed how dilution works. Under a post-money SAFE, the valuation cap includes all SAFE holders and the option pool—meaning founders can calculate their dilution with more certainty, but it also means each additional SAFE at the same cap is directly dilutive to the founder.
Convertible notes predate SAFEs and remain governed by traditional debt principles. A note is a loan that converts into equity under specified conditions. Key terms include the interest rate (typically 2-8% annually), the maturity date (usually 12-24 months), the valuation cap, and the conversion discount. Unlike SAFEs, notes create a legal obligation to repay if they don’t convert—a feature that gives investors leverage but can create awkward dynamics if the company can’t raise a qualifying round before maturity.
The SEC treats both SAFEs and convertible notes as securities. Under Rule 506(b) of Regulation D, companies can sell these instruments to accredited investors and up to 35 sophisticated non-accredited investors without general solicitation. Under Rule 506(c), general solicitation is permitted but all purchasers must be verified accredited investors. Form D must be filed with the SEC within 15 days of the first sale of securities. These requirements apply regardless of how “simple” the instrument appears.
John’s Tip: If you’re a founder about to sign your third or fourth SAFE, stop and model the cap table. Don’t guess. Pull out a spreadsheet—or better yet, have your attorney do it—and look at what your ownership actually looks like after conversion under three scenarios: a strong Series A, a modest Series A, and a down round. If any of those numbers surprises you, you need to rethink the terms before you sign.
Frequently Asked Questions
Can I use a SAFE template I found online without a lawyer?
You can, but you probably shouldn’t. The standard Y Combinator SAFE form is publicly available and well-drafted—but it’s a starting point, not a finished product. Founders routinely misunderstand valuation cap mechanics (particularly the difference between pre-money and post-money SAFEs), neglect to model stacking effects when issuing multiple SAFEs, and fail to comply with securities law requirements. The instrument may be four pages long, but the consequences of getting it wrong extend well beyond those four pages.
What is a valuation cap and how does it work?
A valuation cap sets the maximum company valuation at which a SAFE or convertible note converts into equity. If the Series A valuation exceeds the cap, the SAFE holder converts at the cap price—effectively receiving a discount for investing early. For example, if a SAFE has a $10 million cap and the Series A is priced at $20 million, the SAFE holder converts as if the company were valued at $10 million, receiving twice as many shares per dollar invested as the Series A investors. The cap is the single most important economic term in a SAFE.
What happens if a convertible note reaches maturity and no financing has occurred?
This is one of the key differences between notes and SAFEs. At maturity, the investor technically has the right to demand repayment of the principal plus accrued interest. In practice, most investors don’t call the note—forcing a startup into insolvency rarely serves their interests. Instead, the parties typically negotiate an extension, a conversion at agreed-upon terms, or amended deal terms. But the leverage dynamic shifts at maturity, and founders should be aware of that risk when they agree to a maturity date.
How many SAFEs can I stack before it becomes a problem?
There’s no legal limit, but there’s a practical one. Every SAFE you issue at a given valuation cap represents future dilution that will materialize at conversion. The more SAFEs you stack—especially at different caps—the more complex and potentially surprising the conversion math becomes. I typically recommend that founders model the cap table after each new SAFE and before issuing additional ones. If your fully-diluted founder ownership after projected conversion drops below 50-60% before a Series A, you’re in a structurally difficult position for future fundraising.
About John Montague
John Montague has worked with technology companies and venture investors for over 15 years, advising on SAFE agreements, convertible notes, and equity financings from seed through growth stage. A graduate of the University of Florida’s Fredric G. Levin College of Law, John previously structured venture capital and private equity transactions at Locke Lord LLP (now Troutman Pepper Locke), an AM Law 200 firm. He teaches Entrepreneurial Law at the University of Florida’s College of Business and advises clients from Montague Law’s offices in Fernandina Beach and Coral Gables (Miami), Florida.
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