SAFE notes confuse most people because the name sounds like it involves actual currency. It doesn’t. As someone who’s invested in startups using both traditional equity and SAFE agreements, I can tell you the simplicity is the whole point. Here’s how they actually work.
What a SAFE Actually Is
Y Combinator created SAFEs in 2013 because convertible notes were too complicated for early-stage startup investing. A SAFE—Simple Agreement for Future Equity—gives you the right to get shares later, when the company raises a priced equity round. You put in money now, get equity later, skip the debt mechanics and interest calculations.
No maturity date. No interest accrual. Just an agreement that converts to equity when certain conditions trigger.
A Real-World Example
Let’s say you invest $100,000 in a startup through a SAFE with a $5 million valuation cap and 20% discount. The company later raises Series A at a $10 million valuation.
Your SAFE converts at the $5 million cap, not the $10 million actual valuation. You’re getting shares as if the company was worth half what Series A investors paid. The 20% discount applies on top of that, meaning your $100,000 effectively buys shares as if you’d invested $125,000.
Both mechanisms work in your favor, compensating for the early risk you took.
Key Terms That Matter
Valuation cap sets the maximum price at which your SAFE converts. If the company raises at a higher valuation, you still convert at the cap. This protects you from dilution if the company takes off.
Discount rate gives you a percentage reduction from what later investors pay. Usually 15-25%. Works alongside or instead of a cap depending on the negotiation.
Pro-rata rights let you invest in future rounds to maintain your ownership percentage. Important if you believe the company will succeed and want to keep your stake from shrinking.
The Risks Nobody Emphasizes Enough
If the company fails, your money is gone. SAFEs aren’t debt—you don’t have creditor rights in bankruptcy. The company owes you nothing until those conversion conditions trigger.
Dilution happens in subsequent rounds too. Your percentage shrinks as the company issues more equity. Pro-rata rights help but require additional capital.
Probably should mention the illiquidity. Startup equity doesn’t trade on exchanges. You’re waiting years for a liquidity event—acquisition, IPO, or nothing at all.
Why SAFEs Still Make Sense
For startups, SAFEs are fast and cheap. No negotiating complex term sheets, no legal fees for debt documentation. The money arrives quickly.
For investors, SAFEs offer startup exposure without the overhead of traditional venture deals. The conversion mechanics protect early-stage risk takers with favorable terms when things go well.
Just understand what you’re actually buying: upside potential with genuine downside risk.
