What is a SAFE Note? A Founder’s Guide to Simple Agreements for Future Equity

One of the first significant challenges for any startup is securing funding. Traditional equity rounds can be expensive and time-consuming, especially in the early stages of a startup when the product is still evolving. That’s where SAFEs (Simple Agreements for Future Equity) come into the game.

Initially, Y Combinator introduced SAFE notes in 2013, which have become a go-to tool for fundraising at startups that are seeking to raise capital quickly and in a way that is good for founders without giving up immediate equity.

In this blog, we’ll break down:

• What a SAFE note is
  
• How it works
  
• Key terms you need to know
  
• Types of SAFE notes
  
• What happens to SAFE notes in different scenarios
  
• SAFE vs convertible notes
  
• History of SAFE notes
  
• Why it’s a good tool to raise initial funds
  
• Pros and cons
  
• When to use a SAFE
  

What Is a SAFE Note?

A SAFE is a legal agreement between a startup and an investor that allows the investor to convert their investment into equity at a future date, typically when the company raises its next priced round.

The key idea is that you receive money now, and the investor receives equity later, under the agreed-upon conditions set by both parties.

Unlike a loan, a SAFE has:

• No interest rate
  
• No maturity date
  
• No monthly payments
  

It’s a simpler, faster, and cheaper alternative to convertible notes or priced equity rounds, which require full valuations and legal structuring upfront.

A Brief History of SAFE Notes

Y Combinator came up with SAFE notes in 2013 as a different way to use convertible notes. The reason is to make early-stage startup funding simpler and less risky for founders. Many entrepreneurs at the time had to deal with the debt-like requirements of convertible notes, such as interest rates and maturity dates that may cause stress if the startup didn’t raise a priced round fast enough.

Since then, SAFEs have become a standard funding instrument, particularly in early-stage rounds, due to their simplicity, flexibility, and founder-friendly structure.

How Does a SAFE Work?

Here’s a typical flow:

1. Startup raises funds via a SAFE
   
2. Investor gives the startup capital in exchange for a SAFE
   
3. Later, during a “trigger event” (usually a priced Series A round), the SAFE converts into equity
   
4. The number of shares the investor gets is based on a valuation cap and/or discount
   

Key SAFE Terms Explained

1. Valuation Cap

Sets a maximum valuation at which the SAFE converts. This protects the investor from dilution if your startup grows rapidly before the next priced round.

For instance, the investor’s SAFE converts as though the company were worth $5 million if your cap is $5 million and your Series A is $10 million.

2. Discount

A percentage reduction on the next round’s share price. Commonly 10–25%. Investors get in cheaper than Series A investors.

For instance, the SAFE investor receives shares at $0.80 if the Series A price is $1.00 per share and the discount is 20%.

3. Most Favored Nation (MFN)

Allows an investor to benefit from better terms if future investors are given them under separate SAFE agreements.

4. Pro Rata Rights

Gives investors the option to invest in future rounds to maintain their percentage ownership.

Types of SAFE Notes

There are four primary types of SAFE notes:

1. SAFE with a Valuation Cap, No Discount
   Investor converts based on the cap if the valuation exceeds it.
   
2. SAFE with a Discount, No Valuation Cap
   Investor converts at a discounted price, regardless of the valuation.
   
3. SAFE with Both Valuation Cap and Discount
   The investor benefits from whichever is more favorable at conversion (cap or discount).
   
4. SAFE with No Cap and No Discount
   The riskiest for investors and rare in practice. Investor converts at the same valuation as new investors.
   

What Happens to SAFE Notes in Different Scenarios?

Next Priced Round (e.g., Series A)

SAFE converts into preferred shares at terms defined by the cap/discount.

Acquisition Before Conversion

Depending on the terms of the SAFE, holders may get a payout or convert into common stock. A “liquidity preference” of two times the initial investment or conversion at cap is provided by certain SAFEs.

Startup Shuts Down Before a Round

The investor gets nothing. SAFEs are not debt instruments, so there’s no legal obligation to repay.

Why It’s a Good Tool to Raise Initial Funds

SAFE notes are particularly valuable during the early, uncertain stages of a startup when:

• You don’t have a clear valuation yet
  
• You need to move fast
  
• Legal fees and equity structuring feel overwhelming
  
• Investors are aligned with long-term growth, not immediate returns
  

It provides founders with flexibility and control while reducing the upfront legal complexities and costs of traditional fundraising.

SAFE vs Convertible Notes

Feature	SAFE Note	Convertible Note
Interest Rate	None	Typically 2%–8% annually
Maturity Date	None	Has a fixed maturity
Legal Simplicity	Very simple	More complex
Dilution Protection	Valuation cap, discount	Cap and discount
Investor Recourse	No legal recourse if no equity round	Treated as debt (can be enforced)
Debt-Like Structure	Not a debt	Is a debt
Enforceability	No repayment recourse	Debt recovery possible
Conversion Trigger	Next equity round	Next round or maturity

SAFE notes remove debt complications, while convertible notes behave like loans, often pressuring founders with deadlines and accrued interest.

Pros and Cons of SAFEs

Pros

• Fast and founder-friendly
  
• No interest or maturity date
  
• Easy to execute with low legal costs
  
• Avoids debt obligations
  

Cons

• Investors may feel unprotected
  
• Overuse can cause cap table confusion
  
• No investor governance rights
  
• No recourse if the startup never raises again
  

When to Use a SAFE

Ideal for:

• Pre-seed and seed rounds
  
• Angel investor participation
  
• Startups that need capital quickly
  
• Founders who want to avoid pricing negotiations
  

Less ideal for:

• Large venture rounds with institutional investors
  
• Complex equity or control structures
  
• Situations requiring immediate governance or board involvement
  

Final Thoughts

SAFE notes have become a cornerstone of early-stage startup fundraising for good reason. They’re quick, flexible, and minimize early dilution headaches for founders.

But they’re not a one-size-fits-all solution. Always understand the implications, especially around cap table management and investor rights. Most importantly, consult with a startup-savvy attorney before executing a SAFE round. Raising money is hard, but with tools like SAFE notes, it doesn’t have to be complicated.

How Codeventures Can Help

Codeventures simplifies startup financing by offering essential tools and guides like startup equity calculator and a comprehensive startup guide to pitch deck templates and curated funding resources. These assets help founders make informed decisions, manage cap tables effectively, and confidently approach investors.