A SAFE note is a post-money investment agreement that converts into equity when your company hits specific milestones. You get money now. The investor gets a claim on future equity later. That’s it.
Y Combinator created SAFE notes in 2013 to replace convertible notes because convertible notes are genuinely annoying to deal with. Interest accrual, maturity dates, default risk. SAFE strips all that away. Simpler. Faster. Cheaper to execute.
If you’re raising early-stage money and haven’t encountered SAFE notes yet, you will. They’ve become the default instrument for seed-stage companies.
Why SAFE Notes Exist At All
The honest truth about early-stage fundraising: nobody knows what your company is worth. Your revenue might be zero. Your product might be incomplete. You have a deck, a pitch, and a team.
So founders and investors had a problem. Investors wanted equity. Founders wanted capital. But agreeing on a valuation felt impossible. So they used convertible notes as a bridge. The investor puts in money as debt. Later, when the company raises a real round at a real valuation, the debt converts into equity at a discount.
This worked. But convertible notes carry debt mechanics. Interest accrues. There’s a maturity date. If the company doesn’t hit a conversion trigger, someone has to decide whether it’s a worthless investment or an actual debt obligation. Messy.
Y Combinator wanted something cleaner. They built SAFE. No interest. No maturity date. No debt classification. Just pure optionality.
How SAFE Notes Actually Work
The Basic Mechanics
An investor gives you money. Say $100,000. You give them a SAFE note. The note specifies when conversion happens: a priced equity round, an acquisition, or a dissolution event.
When any of those happens, the SAFE converts into equity at a specific rate based on a valuation cap and/or a discount rate.
Valuation Cap
The valuation cap is a ceiling. If your next round values the company at $10 million or more, this SAFE converts as if the company was only worth $8 million. The investor gets equity at the lower valuation. That’s their discount for taking early risk.
Discount Rate
Some SAFEs have a discount rate instead of (or in addition to) a valuation cap. If the discount is 20%, and the next round happens at a $5 million valuation, the SAFE investor gets equity as if the round was at $4 million.
The investor gets whichever is better: the valuation cap or the discount rate.
SAFE Notes vs. Convertible Notes vs. Priced Rounds
These three get confused constantly.
A priced round means you and investors agree on a valuation right now. Series A rounds are always priced. Formal. Requires lawyers. Takes weeks. Expensive.
A convertible note is debt that converts into equity later. It accrues interest. Has a maturity date. Less common now because SAFE notes are cleaner.
A SAFE note is neither debt nor equity. An agreement to convert into equity in the future. No interest. No maturity date. No debt classification.
We’ve written more about this in our comparison of priced rounds, SAFEs, and convertible notes.
The Real Problems With SAFE Notes
Equity Surprise
Founders sometimes don’t fully understand what their cap table will look like after SAFE conversion. You raise $500k from five different SAFE investors with different caps. Then you raise Series A. The conversion happens. Suddenly you own less of your company than you thought.
This is your fault. Model out the cap table impact before signing multiple SAFEs. Run the math on what happens in a Series A at different valuations. Most founders don’t. Then they get surprised.
No Say in Dilution
SAFE holders have no governance rights. No board seat. No information rights. No vote on future rounds. They’re pure equity bets. If you raise Series B and dilute everyone, SAFE holders from the seed round have zero say.
SAFE Note Terms Worth Arguing About
Post-Money vs. Pre-Money
This matters more than people think. A post-money SAFE values the company after the SAFE money arrives. Post-money SAFEs are standard now. Insist on post-money.
Valuation Cap Range
For seed stage, typical caps range from $5 million to $15 million depending on the market and your traction. Typical discounts are 10% to 30%. If someone wants a 50% discount, that’s insane. Push back.
Common SAFE Mistakes Founders Make
Signing too many SAFEs without understanding the cap table impact is the most common mistake. One founder signed SAFEs with four different investors at different caps and then raised Series A. The cap table became a nightmare because the conversions triggered in weird ways.
Not keeping track of total dilution is another. You raise $500k in SAFEs. Then $500k more. Then another $300k. If all those SAFEs convert in a Series A, the founder dilution from the seed stage can be massive. Model this out before you sign the tenth SAFE.
Letting investors negotiate weird terms is the third mistake. Some investors try to add liquidation preferences to SAFEs. Most of these are unnecessary and hostile. Simple SAFEs are better.
The Syndicate’s Take
SAFE notes are the standard for seed fundraising. They exist for a reason. Simple, fast, and fair if you keep them simple.
The mistake founders make is treating SAFEs as free money. They’re not. They’re equity with conversion mechanics. Every SAFE you sign dilutes your cap table.
Read Y Combinator’s actual SAFE documents. They’re simple and well-drafted. Use the post-money version.
If you’re confused about seed valuation broadly, we’ve written about why seed valuations are somewhat made up anyway. And for understanding what happens after you close, read about what actually happens post-term sheet.