SAFE Notes: The Standard of Early Stage
The Simple Agreement for Future Equity (SAFE) was created by Y Combinator in 2013 to replace convertible debt. It is not debt, it has no maturity date, and it accrues no interest. It is a warrant to purchase stock in a future priced round.
Valuation Caps vs Discounts
Investors take early risk, so they get a better price than later investors. They get this via:
- Valuation Cap: A ceiling on the valuation at which the SAFE converts. If you raise a SAFE at a $10M cap, and your Series A is at a $20M pre-money valuation, the SAFE investors convert as if the valuation was $10M (they get shares half price).
- Discount: A percentage discount (usually 20%) on the next round's price.
Most SAFEs have either a cap, or a cap and a discount. If it has both, the investor gets whichever gives them a better price.
The Post-Money Shift (2018)
In 2018, YC updated the standard SAFE from "Pre-Money" to "Post-Money". A Post-Money SAFE fixes the investor's ownership percentage based on the cap. For example, a $1M investment on a $10M post-money cap means the investor owns exactly 10% of the company prior to the priced round, regardless of how many other SAFEs the founder signs. This places all the dilution burden of SAFE stacking onto the founders.