If you’re wondering how do startups raise seed funding, the short answer is a SAFE, a convertible note or a priced equity round. This guide shows how each works, so you can pick the one that fits your stage.
This guide is part of our wider look at ai startups, covering how young companies fund and grow.
| Item | Value |
|---|---|
| Where SAFEs are most often used | Raises of up to $3 million |
| Typical convertible note discount | 20% |
| SAFE interest rate and maturity date | Generally none |
| Convertible note features | Interest accrual and a maturity date |
| Valuation in a priced round | Set before the investment closes |
The figures come from SeedLegals (published January 2025) and StartEngine (May 2026). Deal norms can change, so check the sources before you rely on them.
What seed funding means in practice
Seed funding is an early-stage raise, and the label covers more than one deal structure. Capbase, in its February 2026 update, notes that early unpriced rounds are often called seed rounds, while the designation Series Seed often, but not always, refers to a priced round.
So the useful question is not what the round is called. It is whether the investment sets a company valuation now or defers it. As StartEngine’s May 2026 post puts it, unpriced rounds commonly use SAFEs or convertible notes and are often associated with early-stage fundraising where valuation may still be uncertain (StartEngine).
The two paths differ in a few ways that matter to you as a founder:
- Valuation timing: negotiated before closing in a priced round, deferred in an unpriced one.
- Ownership clarity: known immediately in a priced round, dependent on future conversion terms otherwise.
- Documentation: heavier in a priced round, lighter and faster in an unpriced one.
- Investor rights: usually broader in a priced round.
SAFEs and convertible notes: the unpriced route
A SAFE, or Simple Agreement for Future Equity, lets investors receive equity later under predefined conversion terms. Unlike convertible notes, SAFEs generally do not include interest rates or maturity dates, according to StartEngine.
SeedLegals says the SAFE was designed as a faster, simpler way to agree deal terms and has become the most often-used financing instrument for raises of up to $3 million. It credits the venture incubator Y Combinator with coming out with the SAFE (SeedLegals, January 2025).
A convertible note starts life as debt. Capbase describes it as a form of debt with a maturity date and interest rate (Capbase). If no qualifying financing happens before maturity, the company and investors may need to renegotiate terms or address repayment obligations.
How conversion works
Investors hand over cash now, and the investment converts into equity at a later priced round. The conversion terms are usually based on a valuation cap, a discount rate, or both (StartEngine).
On convertible notes, SeedLegals says a discount of 20% is typical, though it varies (SeedLegals).
Trade-offs to watch
The valuation cap is where most of the risk sits. Capbase warns that if the cap is set too high, note holders may receive little more than their discount, while a cap set too low can expose founders to serious dilution (Capbase).
Investors also give something up. SeedLegals points out that until a SAFE converts into stock, its holder is not a shareholder or board member with voting rights, so some investors ask for side letters that can add back time and legal cost.
How does a priced round work?
In a priced round, the company’s valuation is negotiated and established before the investment closes. Investors typically buy preferred shares at a fixed price per share based on the agreed valuation (StartEngine).
StartEngine lists the typical sequence:
- The company and investors negotiate a valuation.
- A price per share is determined.
- Preferred stock is issued to investors.
- Legal agreements are finalized.
- Capital is invested into the company.
Preferred shares carry liquidation preferences, which means their holders must be compensated for their investment before holders of common shares. Capbase adds that the lead investor often takes the first outside board seat, and that this is less likely when many small investors share the round.
The paperwork is heavier too. As of Capbase’s February 2026 update, a priced round requires an SEC filing detailing the stock offering, and legal fees for unpriced rounds are typically a fraction of those for priced rounds (Capbase).
Choosing between priced and unpriced seed rounds
There is no single right answer. Early-stage startups often use unpriced rounds to raise capital quickly before establishing a formal valuation, while priced rounds suit companies with some operating history, traction or revenue (StartEngine).
Consider these questions:
- Do you have enough traction to defend a valuation in negotiation?
- Do you need money quickly, with minimal legal cost?
- Can you model how SAFEs or notes will dilute you at the next round?
- Will your investors insist on information, voting or board rights now?
Traction is the evidence investors look for, and understanding what is product market fit helps you judge whether yours is strong enough to support a priced deal. Some founders also look at programs that bundle funding with mentoring, and a guide on what is a startup accelerator explains how those work.
Frequently asked questions
Is a SAFE a loan?
Show answer
No. A SAFE has no debt to repay, and it generally carries no interest rate or maturity date, according to StartEngine. A convertible note, by contrast, begins as debt.
What is a valuation cap?
Show answer
It sets a ceiling on the valuation used when a SAFE or note converts. Capbase says it performs a similar function to other valuation methods, though legally it is not a valuation (Capbase).
Do SAFE investors own shares straight away?
Show answer
No. Until the SAFE converts into stock, the holder is not a shareholder or board member with voting rights, as SeedLegals explains.
Is a Series Seed round the same as a seed round?
Show answer
Not always. Early unpriced rounds are often called seed rounds, while Series Seed often, but not always, refers to a priced round, per Capbase.
