SAFE Notes Explained: The Modern Fundraising Tool Every Founder Should Understand
Raising early-stage capital has evolved significantly over the past decade. One of the most important innovations has been the SAFE (Simple Agreement for Future Equity)—a fundraising instrument that has largely replaced convertible notes for pre-seed and seed-stage startups. If you're planning to raise capital, understanding how SAFEs work is essential.
What Exactly Is a SAFE?
A SAFE is a legal contract where an investor provides capital to your startup now in exchange for the right to receive equity later, typically when you raise a priced round. Unlike equity, a SAFE doesn't represent immediate ownership—and unlike debt, it doesn't accrue interest or have a maturity date.
This simplicity and founder-friendliness have made SAFEs the default choice for early-stage fundraising.
How SAFEs Differ from Convertible Notes
While both SAFEs and convertible notes are designed to delay valuing your company until a later financing round, they have key differences:
Interest: Convertible notes accrue interest; SAFEs don't
Maturity Date: Notes have a deadline for conversion or repayment; SAFEs have no expiration
Complexity: SAFEs are typically simpler documents with fewer negotiable terms
These differences generally make SAFEs more founder-friendly, though both instruments still result in dilution when they convert to equity.
Valuation Caps and Discounts: The Key Terms
Most SAFEs include one or both of these key economic terms:
Valuation Cap
A valuation cap sets the maximum company valuation at which the SAFE converts to equity. If your Series A valuation is higher than the cap, the SAFE investor gets a better deal than new investors.
For example, if an investor puts in $100K with a $4M valuation cap, and your Series A is at $8M pre-money, they'll convert as if the valuation were still $4M—effectively doubling their ownership compared to a Series A investor.
Discount
A discount (typically 10-20%) gives the investor a lower price per share than new investors in your next round. It's another way to reward early risk-taking.
Many SAFEs include both a cap and a discount, with the investor receiving whichever gives them more shares at conversion.
The 2023 SAFE Updates: What Changed
In 2023, Y Combinator released updated SAFE templates—the first major revision since 2018. Key changes include:
Simplified MFN (Most Favored Nation) provisions clarifying when investors receive better terms
Modified pro rata rights now included directly in the standard SAFE rather than as a separate side letter
Revised valuation cap mechanics with refined calculation methodology
Streamlined documentation with clearer language
These changes generally create more standardization and transparency, though they also formalize pro rata rights that give investors the option to maintain their ownership percentage in future rounds.
Common Founder Mistakes with SAFEs
When using SAFEs, avoid these pitfalls:
Not tracking aggregate dilution: Raising multiple SAFEs without modeling their combined impact can lead to surprise dilution
Misunderstanding conversion terms: The mechanics of how SAFEs convert can be complex
Inconsistent terms across investors: Using different caps or terms creates unnecessary complexity
Giving early investors significantly lower caps than later ones: This can create major equity skew at conversion
When to Use SAFEs vs. Priced Rounds
SAFEs are ideal for:
Pre-seed and seed stages when valuation is difficult
Raising smaller amounts quickly
Situations where you want to minimize legal costs
Rolling closes (accepting investments over time)
As you approach Series A, investors will typically expect a priced round with preferred stock rather than continuing with SAFEs.
Final Thoughts
SAFEs have revolutionized early-stage fundraising by providing a simpler, faster way to bring capital into your startup. Their founder-friendly terms and standardized structure make them attractive for initial fundraising.
However, they still represent future dilution that must be carefully tracked and modeled. Understanding the mechanics of valuation caps, discounts, and conversion will help you make informed decisions about how much to raise and on what terms.