As a founder, you may be wondering how to choose between SAFE or convertible notes for your startup. Pre-SAFE notes are diluted by all funding and notes that occur before the maturity date. Post-SAFE notes are only diluted by the funding round that triggers conversion. Pre-SAFE notes lead to less dilution for the founders and more dilution for the note holders while Post-SAFE notes lead to the opposite. Pre-SAFE notes are more difficult to calculate ownership when there are more investors and notes compared to Post-SAFE notes. In general, the reason to go with a note is a shorter time period to receive funding and lower associated cost. Though the cost of a priced equity round has come down.
Convertible Notes are a debt instrument that convert into equity at either a qualifying event or at the maturity date. They also accrue interest (compounded annually) which converts into equity as well. Their conversion is pre-money so they will be diluted by other notes and other funding pre-Series A. Though it is rare for a convertible note to be repaid at the maturity date and are generally extended.
Post-valuation funding leads to greater dilution for founders since multiple notes won’t dilute each other only the founders and existing common stock
The interest on the note leads to more dilution.