Glossary
What Is a SAFE Note?
Updated · Team Fonda
Short answer
A SAFE (Simple Agreement for Future Equity) is a short contract in which an investor gives your startup money now and receives shares later, when you raise a priced funding round. It is not a loan: it has no interest and no repayment date.
Key takeaways
- A SAFE delays the valuation question until a later priced round.
- The valuation cap and the discount decide how many shares the investor gets when the SAFE converts.
- With a post-money SAFE, investor ownership at conversion = investment / post-money valuation cap.
- SAFEs are quick to sign, which makes it easy to give away more of the company than you realize.
What a SAFE means in plain words
Very early on, nobody can say with confidence what your company is worth. A SAFE lets you take money anyway. The investor pays today, and the agreement says their money will turn into shares when a later investor sets a price. People often say "SAFE note", but a SAFE is not a note, because a note is debt.
The SAFE was created at Y Combinator in 2013, and Y Combinator publishes the standard documents for free on its SAFE documents page. That page lists three versions: one with a valuation cap, one with a discount, and one with neither, called MFN (most favored nation), which lets the investor take on better terms you give to later SAFE investors. It also says the post-money SAFE has been Y Combinator's standard since 2018.
How a SAFE converts into shares
- Valuation cap: the highest valuation at which the SAFE converts. If your next round values the company above the cap, the SAFE investor still converts at the cap and so gets a lower price per share than the new investors.
- Discount: a percentage off the price that new investors pay in the next round.
- Post-money: the cap describes the company's value after the SAFE money is counted. This makes the investor's ownership easy to work out on the day you sign.
Formula (post-money SAFE with a valuation cap)
Investor ownership at conversion = amount invested / post-money valuation cap. This is the share before the new round's investors dilute everyone.
Try different caps and amounts in the free SAFE note calculator.
A worked example
The numbers below are invented to show the mechanics. Say an angel invests $100,000 on a post-money SAFE with a $2,000,000 valuation cap. A year later you raise a priced round at an $8,000,000 pre-money valuation, selling 20% of the company to new investors.
- The round values the company above the cap, so the SAFE converts at the cap.
- SAFE ownership at conversion: $100,000 / $2,000,000 = 5%.
- The new investors then take 20%, which dilutes everyone else by a fifth. The SAFE holder ends at 5% x 80% = 4%.
- Had the same $100,000 been invested at the new round's price, it would have bought far less. The cap is the reward for investing early.
Now say you had signed four SAFEs like this one. Together they would convert into 20% of the company before the new round even starts. This stacking is the main thing to watch.
Why it matters for a first-time founder
You are most likely to meet a SAFE at your first outside money: a pre-seed round, a cheque from an angel investor or an accelerator offer. It is popular at that stage because it is short and standard, so both sides spend less on lawyers and less time negotiating.
The cap you can ask for depends on what you can show. Customer interviews, a waiting list or early revenue all strengthen your position. In Fonda's journey the Raise step sits in the Scale phase, after you have validated the idea with real customers. If you are still earlier than that, start with how to validate a startup idea.
Common mistakes
- Treating SAFE money as free. There is no dilution on signing day, but it arrives at conversion. Track every SAFE on your cap table as if it had already converted.
- Mixing up pre-money and post-money caps. The same number means different ownership. See pre-money vs post-money valuation.
- Setting the cap too low to close fast. A low cap hands over a large stake and can make the next round harder to price.
- Editing the standard form without advice. Small wording changes can have large effects. Securities rules also differ by country, so have a startup lawyer check before you sign.
Related terms
The closest relative is the convertible note, which also converts into shares later but is a loan with interest and a maturity date. The result of either one converting is equity dilution for existing shareholders.
Frequently asked questions
Is a SAFE debt?
No. A SAFE has no interest rate and no date by which it must be repaid. It is a right to receive shares in the future. A convertible note, by contrast, is debt until it converts.
What happens to a SAFE if the startup never raises a priced round?
The SAFE stays outstanding. The standard documents set out what the investor receives if the company is sold or shuts down first, and the outcome depends on the version you signed. Read that section of your SAFE with a lawyer.
Can a SAFE have both a valuation cap and a discount?
The standard versions Y Combinator lists use a cap, a discount or neither. Some founders and investors negotiate a SAFE with both, in which case the investor usually converts on whichever gives the lower price per share. That is a custom document, so get legal advice.
Do SAFE investors get a board seat or voting rights?
Not from the SAFE itself, because the investor does not hold shares until it converts. Any extra rights would come from a separate agreement.