SAFE notes explained. How they work and the math founders must run.
A SAFE note is not equity yet. It is the promise of future equity at the next priced round, at a valuation determined by the terms (cap, discount, or both). Founders often underestimate how much dilution multiple SAFEs cause by Series A conversion time. This guide explains the math, the pre-money vs post-money distinction (which changed everything in 2018), and when to use SAFEs vs priced rounds vs convertible notes.
Start here.
SAFE = Simple Agreement for Future Equity. Investor pays now, receives equity at next priced round.
Unlike convertible notes, SAFEs do not accrue interest and have no repayment date. They convert only when triggered.
SAFE converts at the lower of: (a) the cap valuation, or (b) the next round valuation × discount rate. Either or both can be specified.
Pre-money SAFEs (original 2013 version) and post-money SAFEs (introduced 2018) calculate dilution differently. Post-money is now standard.
Most common: next priced equity round. Also: change of control, dissolution, IPO.
The full picture.
What a SAFE is
A SAFE is a contract: investor sends money now, in exchange for the right to receive equity at the next priced round. The amount of equity depends on the SAFE terms (cap, discount) and the price of that next round. Until conversion, the investor has no shares and no equity rights.
Valuation cap
A cap is the maximum valuation at which the SAFE converts. Example: $5M cap. If next round is at $20M valuation, SAFE converts at $5M (much better for investor). If next round is at $3M, SAFE converts at $3M (same as new investors get).
Discount
A discount is a percentage off the next-round price. Example: 20% discount. If next round is at $20M, SAFE converts as if valuation were $16M (20% off).
Both (cap + discount)
When both are specified, the SAFE converts at whichever gives the investor MORE equity (lower effective price). This is the most common structure.
Pre-money SAFE (original)
Convert as if SAFE money is part of pre-money valuation. Multiple SAFEs interact in unpredictable ways with the next round. Confusing dilution math.
Post-money SAFE (current standard)
Convert as if SAFE money is part of post-money valuation. Each SAFE's percentage is fixed regardless of other SAFEs. Predictable dilution. Now the default.
MFN (Most Favored Nation)
If you sell a SAFE on one set of terms, then a later SAFE on better terms, MFN clause forces earlier SAFE up to the better terms. Common protection clause.
Pro-rata rights
Right for SAFE investor to invest in the next priced round to maintain their percentage ownership. Sometimes included; sometimes negotiated.
When to use SAFE
Pre-seed and seed rounds. Speed and simplicity over precise valuation. When you cannot or do not want to set a formal valuation yet.
When NOT to use SAFE
Series A and beyond (use priced equity). When investors are not familiar with SAFEs (use convertible notes or priced). When you need debt structure for tax or other reasons.
Worked example: $500k SAFE with $5M post-money cap
| Founder owns 100%, 10M shares | Founder: 100% |
| Investor signs $500k SAFE at $5M post-money cap | SAFE represents 10% future equity ($500k / $5M) |
| Series A: $2M raised at $10M pre / $12M post | Series A investor gets 16.7% ($2M / $12M) |
| SAFE converts at $5M cap (better for investor than $10M new-round price) | SAFE investor gets 10% |
| Option pool 15% added pre-money (founder dilution) | Founder: 100% × (1 - 0.10) × (1 - 0.15) × (1 - 0.167) ≈ 64% |
| Final cap table | Founder ~64%, SAFE investor 10%, Series A investor ~17%, option pool ~15%, rounding |
Common questions.
What does SAFE stand for?
Is a SAFE debt or equity?
What is a valuation cap?
Pre-money vs post-money SAFE: which is better for founders?
Should I use a SAFE for friends and family?
Can a SAFE expire?
What happens if there is no next round?
Are SAFEs taxable to the investor?
How much can I raise with SAFEs before needing a priced round?
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