What Is a SAFE Note and Should Your Startup Use One?

What Is a SAFE Note?
A SAFE is a convertible security, meaning investors don’t receive equity right away. Instead, their investment converts into equity during a future priced round, based on predetermined terms.

It’s not debt (like a convertible note), doesn’t have an interest rate, and doesn’t require repayment.

Key Terms in a SAFE
Valuation Cap: The maximum valuation at which the SAFE will convert. Protects investors from excessive dilution.

Discount Rate: Optional — gives investors a % discount when converting in the next round.

Pro Rata Rights: The right to participate in future rounds to maintain ownership.

MFN (Most Favored Nation): Optional — allows SAFE holders to adopt better terms offered in later SAFEs.

Post-Money vs Pre-Money SAFEs:

Pre-money SAFEs (pre-2018) diluted founders unexpectedly.

Post-money SAFEs offer clearer dilution modeling.

🔍 Use the Y Combinator SAFE generator to download standardized templates.

Why Startups Use SAFEs
✅ Speed: Simpler and faster to execute than equity rounds
✅ Low Legal Costs: No need for full priced-round negotiation
✅ Flexibility: No set valuation or ownership until later
✅ Founder-Friendly: Delays dilution and cap table complexity

Why Investors Accept SAFEs
Lower legal overhead

Quick access to promising early-stage startups

Potential for high upside if the company raises a priced round

That said, institutional investors may prefer priced rounds for control and clarity.

SAFE vs Convertible Note
Feature SAFE Convertible Note
Type Equity agreement Debt instrument
Interest rate None Typically 4–8% annually
Maturity date None Yes — usually 12–24 months
Repayment obligation No Yes (if not converted)
Simplicity High Moderate

Downsides of SAFEs
❌ Can lead to unexpected dilution if multiple SAFEs are stacked
❌ No guarantee of conversion if no future round occurs
❌ Complex cap table modeling (unless using post-money SAFE)
❌ Not ideal for every investor type (some VCs prefer priced rounds)

When to Use a SAFE
You’re pre-seed or seed stage

You don’t want to price your company yet

You have multiple small checks or angel investors

You want to close money quickly without a long legal process

Pro Tips
Use post-money SAFE templates to model dilution clearly

Avoid stacking SAFEs with different terms

Use a cap table tool like Carta or Pulley to model impact

Communicate clearly with investors about expected conversion terms