Module 2 — Instruments and the Arithmetic · Lesson 2.1
Priced Equity, SAFEs and Convertible Notes
What you are actually selling, and when each instrument fits
What you'll learn
- Describe a priced preferred-stock round and the documents that make it up
- Explain how a post-money SAFE converts, and how it behaves in a sale or a shutdown
- Contrast a convertible note with a SAFE on maturity, interest and creditor status
- Choose an instrument based on round size, investor type and timing
Founders talk about 'raising a seed round' as if it were one thing. Legally it is a choice between instruments, and each one moves risk and control around differently. The good news is that the market has standardised most of the paper: the NVCA publishes model documents for priced rounds and Y Combinator publishes the SAFE. Knowing what is in the standard forms is how you recognise, quickly, when someone has changed them.
The priced round: convertible preferred stock
In a priced round the company sells shares at an agreed price per share, which fixes a valuation. In the US, institutional venture investors typically buy convertible preferred stock — preferred because it carries rights common stock does not, convertible because it can turn into common stock, which it usually does at an IPO or when conversion pays more than the preference.
The National Venture Capital Association's model legal documents are the industry's common starting point, published so that financings cost less, close faster and follow shared norms. The core set as of 2026 is the amended and restated Certificate of Incorporation, which creates the preferred stock and sets its economic and control rights; the Stock Purchase Agreement, under which the shares are bought and the company makes its representations; the Investors' Rights Agreement, covering information rights, registration rights and the right to buy into future rounds; the Voting Agreement, which fixes how the board is elected; and the Right of First Refusal and Co-Sale Agreement, which governs founders selling their shares. The Certificate of Incorporation, Stock Purchase Agreement and Investors' Rights Agreement were last updated in October 2025, the Voting Agreement in June 2026.
A priced round takes longer and costs more in legal fees than a SAFE, because there is more to negotiate and everyone closes together. In exchange, it settles the questions a SAFE defers: the price, the board, the investors' protections. Lesson 4.3 walks through those terms.
The SAFE: a right to future equity
Y Combinator introduced the Simple Agreement for Future Equity in late 2013 as a replacement for convertible notes, and in 2018 replaced the original version with the post-money SAFE that is now the standard. YC currently publishes three US post-money forms — valuation cap with no discount, discount with no valuation cap, and an uncapped most-favoured-nation version — plus an optional pro rata side letter, and international versions for Canada, the Cayman Islands and Singapore.
A SAFE is not stock and not debt. The investor pays the purchase amount now; nothing further happens until one of the events the SAFE names. In a priced equity financing the SAFE converts into a series of preferred stock with the same rights as the new money's preferred, at a price set by the post-money valuation cap (or the discount, if that gives the investor more). In a sale of the company the holder receives the greater of its money back or what it would have received had it converted at the cap, ranking behind creditors and alongside non-participating preferred stock. If the company dissolves, the holder is entitled to its purchase amount back, again behind creditors.
The advantages YC gives are speed and simplicity. A founder can close with each investor as soon as both are ready rather than coordinating a single close; there is usually one term to negotiate, the cap; and because a SAFE has no maturity date or interest rate, nobody spends time extending maturities or renegotiating rates. The post-money version adds transparency: ownership sold is the investment divided by the post-money cap, so a founder can add up what has been sold. Lesson 2.2 works through that arithmetic.
The convertible note: debt that becomes equity
A convertible note is a loan. It carries an interest rate and a maturity date, and it usually converts into equity at the next priced round, often with a valuation cap or a discount like a SAFE. Until it converts, the holder is a creditor.
Those two features — maturity and creditor status — are the whole difference, and they cut both ways. For investors, a note's seniority and its maturity give leverage if the company stalls: at maturity the holders can, depending on the terms, demand repayment or renegotiate. For founders that leverage is the cost. The YC guide's point that a SAFE avoids 'extending maturity dates, revising interest rates or the like' is a description of exactly the work a note can create when the next round is late.
Notes have not disappeared. The YC guide's own history is that the SAFE was designed to replace them and has generally done so, but some investors still prefer the protection of being a creditor, particularly where the path to the next round is long. A founder offered a note should read the maturity, the interest rate, what happens at maturity, and whether the note can be forced to convert.
Choosing the instrument
A rough rule of thumb — a starting point, not a measurement of the market: SAFEs for pre-seed and many seed rounds, especially when the money comes from several angels or small funds at different times; a priced round once a lead investor wants a board seat, the full set of preferred-stock protections and a fixed price — typically a large seed or a Series A; notes where the investors require them.
Three cautions apply whichever you choose. First, an instrument does not change the securities law: a SAFE is a security, sold under the same exemption as stock (Lesson 1.4). Second, convertible instruments defer dilution rather than avoiding it; several SAFEs at rising caps can add up to more of the company than a founder expects. Third, the standard forms are standard only until someone edits them. Compare any document you are sent against the published model, and treat a change as a question to ask, not a formality.
For placement agents and fund managers the same choice appears in different clothes — preferred stock or a convertible for an issuer's growth round, a limited partnership interest for a fund — but the question is the same: what does the investor own, when does it become something else, and who is paid first if things go wrong.
Keep the paper and the terms on the deal
- 1
Store the instrument and its terms on the round
In /deals, record the instrument, cap or price, and any discount as custom fields on the round's deal (the agent's update_deal writes them and keeps an audit row). When an investor asks what others got, the answer is one read away.
- 2
Put the documents where the deal can see them
Link the round's Google Drive folder to the deal — the data-room section of the deal panel, or ask the agent to run link_deal_drive_folder — so the SAFE or term sheet and the model forms sit with the round.
- 3
Ask the agent to compare a document to the model
Upload the document you were sent to a chat in /ai-agent and ask it to list every place it departs from the standard form. Treat its list as questions for counsel, not answers.
Instrument discipline
- Non-standard clauses per document
- Count of departures from the published model form in each instrument you sign.
- Healthy signal: Each one should have a stated reason. A Kavanah suggestion: if you cannot say why a clause changed, do not sign yet.
- Days from verbal yes to signed instrument
- Elapsed days between an investor's commitment and the signed SAFE or closing.
- Healthy signal: Short for SAFEs — the instrument exists to make this fast. Long gaps are where commitments evaporate.
- Outstanding convertibles
- Total SAFEs and notes outstanding, by cap or price, that will convert at the next priced round.
- Healthy signal: Always known, always current. Lesson 2.2 shows why the total matters more than any one instrument.
Key takeaways
- ·A priced round sells convertible preferred stock under a set of documents the NVCA publishes as models.
- ·A post-money SAFE converts at the next priced round, returns the money or its as-converted value in a sale, and has no maturity or interest.
- ·A convertible note is debt until it converts, with a maturity and interest that create leverage — and work — if the next round is late.
- ·Every instrument is a security; standard forms help only if you check for changes.
Convertible instruments make the question 'how much of the company have we sold?' harder to answer by feel. The next lesson answers it with arithmetic.
Sources
- 1.Post-Money Safe User Guide
Y Combinator · Y Combinator Documents (current user guide for the post-money safe) · 2018
The safe's 2013 origin as a convertible-note replacement and the 2018 move to post-money; no maturity or interest; conversion in an equity financing, a liquidity event and a dissolution; priority alongside non-participating preferred.
- 2.Y Combinator Documents — the SAFE
Y Combinator · ycombinator.com (page as of October 2026) · 2026
The three current US post-money safe forms, the optional pro rata side letter and the international versions.
- 3.NVCA Model Legal Documents
National Venture Capital Association · nvca.org · 2026
The core financing documents and their update dates (COI, SPA and IRA October 2025; Voting Agreement June 2026; ROFR and Co-Sale April 2026) and their stated purpose.
- 4.How Do Venture Capitalists Make Decisions?
Paul Gompers, William Gornall, Steven N. Kaplan, Ilya A. Strebulaev · NBER Working Paper 22587 · 2016
US venture firms typically invest using convertible preferred equity.