SAFE Note

A SAFE (Simple Agreement for Future Equity) is a contract where an investor gives a startup money now in exchange for the right to receive equity later, usually at the next priced funding round. Unlike convertible notes, SAFEs are not debt: they have no interest, no maturity date, and no repayment obligation.

How a SAFE Works

• Investor invests cash today (e.g., $500K).
• In the next equity financing (e.g., Series A), the SAFE converts into shares.
• The price per share for the SAFE investor is determined by:
  • a valuation cap (maximum company valuation used for their conversion), and/or
  • a discount (percentage reduction vs. the new round’s price).
• The investor converts at whichever is more favorable to them: the cap or the discount.

Example SAFE

• Investment: $500K
• Instrument: post-money SAFE
• Terms: $10M valuation cap, 20% discount

Scenario 1 – Series A at $20M valuation

• Discounted valuation: $20M × 0.8 = $16M
• Cap: $10M
• Better for investor: $10M cap
• Effective ownership: $500K / $10M = 5%

Scenario 2 – Series A at $8M valuation (down round)

• Discounted valuation: $8M × 0.8 = $6.4M
• Cap: $10M
• Better for investor: $6.4M discount
• Effective ownership: $500K / $6.4M ≈ 7.8%

Impact on Employees

When SAFEs convert, they create new shares and dilute existing shareholders, including employees with stock or options. A company with, for example, $2M of outstanding SAFEs will see a significant shift in ownership once those SAFEs convert.

Employees should always ask for a fully diluted cap table, which includes:

• all outstanding SAFEs
• all convertible notes
• the full option pool (granted and ungranted options)

Key Things to Watch

• Post-money vs. pre-money SAFEs
  • Post-money SAFEs (YC standard now) calculate ownership based on the company’s value after the SAFE, which tends to dilute founders and employees more.
  • Pre-money SAFEs calculate based on the value before the SAFE, generally more founder-friendly.
• High valuation caps can be deceptive
  • A $20M cap sounds high, but if the next round is at $15M, the cap is irrelevant and the discount sets the price.
• SAFEs stack over time
  • Multiple SAFE rounds (e.g., $1M in 2023 + $1M in 2024) all convert together at the next priced round.
  • Combined, they can cause more dilution than founders or employees expect.
• No maturity date = less timing pressure
  • Because there’s no deadline, a company can delay a priced round.
  • SAFE holders remain in limbo, and employees don’t see a final, crystallized cap table for a long time.

Related Concepts

• Convertible Note – A predecessor to SAFEs that behaves like debt (interest, maturity date) and later converts to equity.
• Cap Table – A breakdown of who owns what; must include SAFEs and notes on a fully diluted basis to be meaningful.
• Dilution – The reduction in your ownership percentage when new shares are issued (e.g., when SAFEs convert).
• Option Pool – A pool of shares reserved for employees; often created or expanded around SAFE financings and priced rounds.