Convertible Notes vs SAFE Agreements: How One Startup Secured $2M in Seed Funding
Choosing between convertible notes and SAFE agreements can determine the success of your seed round. In this case study, we follow EcoCharge, a cleantech startup that raised $2 million by strategically using both instruments, and learn how you can apply their approach.
Executive Summary / Key Results
- Total Raised: $2,000,000 in seed funding
- Investors: 12 angel investors and 2 venture capital firms
- Instruments Used: Convertible notes ($1.2M) and SAFE agreements ($800K)
- Timeline: 6 months from first pitch to close
- Valuation Cap: $8 million (convertible notes), $10 million (SAFEs)
- Discount Rate: 20% (both instruments)
- Conversion Event: Series A round at $15 million pre-money valuation
- Investor Returns: Convertible note holders received a 43% discount on Series A price; SAFE holders received a 33% discount
Key Result: EcoCharge successfully raised capital without setting a valuation, retained founder control, and built a diverse investor base.
Background / Challenge
EcoCharge was founded in 2021 by Sarah Mitchell and James Torres, two MIT engineers with a breakthrough battery technology. Their product extended electric vehicle battery life by 30%, using a proprietary solid-state design. They needed $2 million to build a pilot manufacturing line and secure key patents. However, they faced common early-stage dilemmas:
- No revenue yet: Pre-revenue hardware startup made valuation negotiation difficult.
- Uncertain valuation: Setting a fixed valuation too early could dilute founders excessively if the company grew faster than expected.
- Investor skepticism: Hardware deep-tech is capital-intensive and perceived as high-risk.
Traditional priced equity rounds were off the table. They needed flexible funding instruments that would defer valuation until a future financing round. The choice: convertible notes or SAFE agreements?
Solution / Approach
After consulting with their legal team and advisors, EcoCharge decided to use both convertible notes and SAFE agreements, each tailored to different investor profiles.
- Convertible Notes: For angel investors who preferred a more traditional instrument with interest accrual and a maturity date. Key terms: $8 million valuation cap, 20% discount rate, 5% annual interest, 24-month maturity.
- SAFE Agreements: For VC firms and experienced angels who favored simplicity and no interest. Key terms: $10 million valuation cap, 20% discount, no maturity date (standard Y Combinator SAFE).
Why both? Convertible notes appealed to risk-averse investors wanting debt-like protection, while SAFEs attracted investors who valued speed and lower legal costs. This dual approach expanded their investor pool and closed the round faster.
Comparison of Instruments
| Feature | Convertible Notes | SAFE Agreements |
|---|---|---|
| Debt or Equity | Debt (converts to equity) | Equity (future equity right) |
| Interest Rate | 5% per annum (accrued) | None |
| Maturity Date | 24 months | None |
| Valuation Cap | $8M | $10M |
| Discount Rate | 20% | 20% |
| Legal Complexity | Moderate (promissory note) | Simple (2-3 pages) |
| Typical Investor | Angels, family offices | VCs, sophisticated angels |
Implementation
EcoCharge executed their funding strategy over six months in three phases:
Phase 1: Education and Preparation (Month 1-2)
- Legal documents: Engaged a startup-savvy law firm to draft both convertible note and SAFE templates.
- Investor materials: Created a data room with technical specs, patent applications, and financial projections.
- Target list: Segmented investors by preference: 20 angels for notes, 10 VCs for SAFEs.
Phase 2: Initial Outreach (Month 3-4)
- Convertible notes first: Pitched to 12 angel investors who had previously invested in hardware startups. Highlighted debt protection and interest.
- Results: Committed $800K from 8 angels within 2 months.
- SAFE agreements: Approached 5 VC firms with a focus on simplicity. Used the convertible note commitments as social proof.
- Results: One lead VC committed $500K via SAFE, followed by another VC committing $300K.
Phase 3: Closing and Conversion (Month 5-6)
- Final closure: Individual angels filled the remaining $400K through convertible notes.
- Total raised: $1.2M notes + $800K SAFEs = $2M.
- Legal costs: $15K (approximately 0.75% of raise) — lower than a priced round.
Conversion Mechanics
At the Series A round (18 months later), the company achieved a $15 million pre-money valuation.
- Convertible note holders received shares at the lower of:
- Valuation cap price: $8M cap / fully diluted shares = price
- Discounted price: Series A price × (1 - 20%) The cap price was lower, so they converted at the cap. Their $1.2M investment bought them $1.2M / ($8M / total shares) = 15% of the company (pre-Series A).
- SAFE holders similarly converted at the $10M cap price, getting $800K / ($10M / total shares) = 8% of the company.
Total dilution from seed investors: 23%, leaving founders with 77% pre-Series A (assuming no other dilution).
Results with specific metrics
- Raise efficiency: Closed $2M in 6 months vs. 9-12 months typical for hardware startups.
- Investor satisfaction: All 14 investors received equity at a significant discount to Series A price. Note holders saw 43% discount; SAFE holders saw 33% discount.
- Founder control: No board seats granted; only standard information rights.
- Legal savings: Estimated $50K less in legal fees compared to a priced seed round.
- Follow-on funding: Successful Series A of $10M led by the same lead VC 18 months later.
Post-Conversion Equity Breakdown
| Instrument | Amount Raised | Conversion Price | Shares Granted | Ownership % |
|---|---|---|---|---|
| Convertible Notes | $1,200,000 | $8M cap | 15% | 15% |
| SAFE Agreements | $800,000 | $10M cap | 8% | 8% |
| Founders (existing) | - | - | 77% | 77% |
Key Takeaways
- Use both instruments to appeal to a broader investor base — note for debt-oriented angels, SAFE for VCs.
- Set realistic valuation caps based on traction and comparables. EcoCharge’s caps were in line with peer hardware startups.
- Negotiate discount rates carefully: 20% is standard but can be adjusted for larger investments.
- Plan for conversion scenarios: Understand how caps vs discounts interact. EcoCharge’s cap was more favorable for investors.
- Keep legal simple: Starting with standard Y Combinator SAFE reduces costs.
- Communicate clearly: Explain terms to investors upfront — avoid surprises.
When to Choose Convertible Notes
- Investors want debt security and interest.
- You expect a longer time to Series A (maturity date provides alignment).
- Legal complexity is acceptable.
When to Choose SAFE Agreements
- Investors prefer simplicity and speed.
- You want no maturity date pressure.
- Raising from VCs who are familiar with SAFEs.
For more guidance, check our articles on convertible note terms and SAFE agreement pitfalls.
About EcoCharge
EcoCharge Inc. is a cleantech company developing next-generation solid-state batteries for electric vehicles. Founded in 2021, the company’s technology increases battery energy density by 30% while reducing costs. EcoCharge has raised $12 million to date and employs 40 people. Learn more at ecocharge.com.
