Raising your first round? You've probably heard of SAFEs. They've become the default instrument for early-stage fundraising, replacing convertible notes for many startups.

But SAFEs can be confusing—especially how they convert and what terms actually mean. Here's everything founders need to know.

What is a SAFE?

A SAFE (Simple Agreement for Future Equity) is a legal agreement where an investor gives you money now in exchange for the right to receive equity later—typically when you raise a priced round.

It's not debt (no interest, no maturity date). It's not equity (no shares issued yet). It's a promise of future shares at a discount or capped valuation.

Brief History

Y Combinator created the SAFE in 2013 to simplify early-stage fundraising. Before SAFEs, startups used convertible notes—debt instruments with interest rates, maturity dates, and more complexity.

SAFEs removed the debt structure while keeping the deferred pricing benefit. They've since become the standard for pre-seed and seed rounds.

How SAFEs Work

The Basic Flow

1. Investor gives you money (e.g., $100,000)

2. You sign a SAFE agreeing to future conversion terms

3. You build your company

4. You raise a priced round (Series A with lead VC)

5. SAFE converts to equity based on agreed terms

6. Investor receives shares at a better price than Series A investors

The key: SAFE investors get rewarded for investing early (more risk) by getting shares at a lower effective price than later investors.

Key SAFE Terms

Valuation Cap

The valuation cap is the maximum valuation at which your SAFE will convert. It protects early investors if your company becomes very valuable.

Example:

SAFE investment: $100,000 with $5M cap
Series A: $20M pre-money valuation
Without cap: $100K would buy 0.5% ($100K ÷ $20M)
With cap: $100K buys 2% ($100K ÷ $5M)

The SAFE investor converts as if the valuation were $5M, not $20M—getting 4x more equity.

Discount

The discount gives SAFE investors a percentage off the Series A price.

Example:

SAFE investment: $100,000 with 20% discount
Series A price: $2 per share
SAFE conversion price: $2 × (1 - 20%) = $1.60 per share
SAFE investor gets: $100,000 ÷ $1.60 = 62,500 shares
Series A investor with $100K gets: $100,000 ÷ $2 = 50,000 shares

The SAFE investor gets 25% more shares than Series A investors for the same money.

Cap AND Discount

Most SAFEs include both. The SAFE converts at whichever is better for the investor.

Pro-Rata Rights

Pro-rata rights let SAFE investors invest in future rounds to maintain their ownership percentage.

MFN (Most Favored Nation)

MFN means if you give future SAFE investors better terms, earlier investors get those terms too.

SAFE vs. Convertible Note

Feature	SAFE	Convertible Note
Interest	None	Yes (typically 5-8%)
Maturity date	None	Yes (typically 18-24 months)
Debt on books	No	Yes
Complexity	Lower	Higher
Investor protections	Fewer	More
Conversion trigger	Priced round	Priced round or maturity

SAFE Dilution: What Founders Miss

Multiple SAFEs Compound

If you raise multiple SAFEs before a priced round, they all convert and dilute you.

Example:

SAFE 1: $200K at $4M cap = 5%
SAFE 2: $300K at $5M cap = 6%
SAFE 3: $500K at $6M cap = 8.3%
Total SAFE dilution: ~19.3%
Plus Series A...

Before your Series A investors even come in, you've given up nearly 20%.

Negotiating SAFEs

What Founders Should Push For:

Higher cap: More founder-friendly
No discount: Or smaller discount (15% vs. 25%)
Limited pro-rata: Or no pro-rata for small checks
No MFN: Or limited MFN scope

What Matters Most

The cap is usually the most important term. A $4M cap vs. $6M cap matters far more than a 15% vs. 20% discount.

Focus your negotiation energy on the cap.

Key Takeaways

SAFE = money now for equity later, at a discount or capped valuation
Valuation cap sets the maximum price for conversion
Discount gives investors a percentage off the Series A price
Post-money SAFEs (current standard) make ownership math transparent
Multiple SAFEs compound dilution—model it before raising
SAFEs are simpler than convertible notes but offer fewer investor protections
The cap is the most important term to negotiate

SAFEs make early-stage fundraising faster and simpler. But "simple" doesn't mean "inconsequential." The terms you agree to now compound through every future round. Understand the math, model your cap table, and negotiate thoughtfully.