What is a SAFE note, in simple terms
The SAFE is the most common pre-seed instrument — and many founders sign one without fully knowing what it does. Here is what a SAFE is, what the cap and discount mean, and what to check before you sign.
TL;DR: A SAFE is money today in exchange for shares later. The investor converts when your next priced round happens, at the better of two terms: the valuation cap or the discount. The cap is the number that matters most. A SAFE is not a loan.
Analogies first
Think of a SAFE as a promise. You promise: "when we price this company, you buy in at the price of an earlier investor, or better." That promise is the entire document.
For founders it reads like debt, because money arrives. For investors it reads like equity, because they own nothing yet. Both of those reactions are correct.
The three terms
Valuation cap. The maximum price the investor converts at.
Example: you raise the seed with a $4M pre-money. The SAFE cap is $2M. The SAFE converts as if the company were worth $2M. The investor gets twice the shares a seed investor gets for the same money.
The cap is the real negotiation. It is the single number in your seed docs that sets investor returns. Every percent you concede on the cap is equity you gave away cheap.
The discount. Usually 10 to 20 percent off the next round price. If the company prices at $10 per share and the discount is 15%, the SAFE converts at $8.50 per share.
The cap and the discount do not compound. The investor uses whichever gives them more shares.
Pro-rata rights. The right to invest in the next round to keep their percentage. Common, not mandatory, rarely what founders worry about.
What a SAFE is not
- Not a loan. No interest, no repayment schedule, no lenders to protect.
- Not a priced round. It does not fix the value of your company. The next round does that.
- Not the only option. Convertible notes are loans that become equity at a future round, with interest and a maturity date. SAFEs skip both.
Read these four lines
Before you sign, confirm these four things exist in the document:
- The company name and the investor name are correct.
- The cap is a number you agreed to, and it is written.
- The discount is the number you agreed to, and it is written.
- The governing law section names the state you expect.
A SAFE template is a few thousand words. Ninety percent of it is boilerplate that will never matter. If those four lines are right, the rest is standard.
The decision it forces
The cap forces one decision before you sign: what is your company worth at the next round? An investor is betting that your cap will be lower than that number. The SAFE is one page; the valuation story around it is the hard part. That story is the same one your public pitch tells, and it starts with a one-sentence pitch.
Next up
The SAFE is easy to sign when you understand the cap. It is harder to understand how it interacts with the rest of the round. Read the whole term sheet terms explained before you sign — the SAFE is one page, the term sheet is the full picture.
Frequently asked questions
What does SAFE stand for?
Simple Agreement for Future Equity, created by Y Combinator. It is not a loan. An investor gives you money today and receives shares later, when your company raises its next priced round.
What is the valuation cap on a SAFE?
The cap is the maximum valuation the investor converts at. If your next round is at $10M and the cap says $5M, the investor gets shares as though the company were worth $5M.
What is the discount on a SAFE?
The discount lets the investor buy shares at a small discount off the next round price, usually 10 to 20 percent. Both the cap and the discount apply, and the investor gets whichever is better.
Is a SAFE a loan?
No. A loan has interest, repayment, and a maturity date. A SAFE has none of those. It converts into shares at a future round, or never converts if no round happens.