A SAFE (Simple Agreement for Future Equity) is an investment instrument where an investor gives a startup cash now in exchange for the right to receive equity later, when the company raises a priced round. It isn't debt — there's no interest and no maturity date — and it isn't equity yet either; it converts into shares only when a triggering event, usually a priced round, happens. The two mechanisms that determine how good a deal the investor got are the valuation cap and the discount rate, and the shift from pre-money to post-money SAFEs in 2018 changed how founders should think about dilution before they sign one.
What is a SAFE note?
A SAFE is a short agreement, typically a few pages, under which an investor provides capital today in exchange for a promise: at the next priced equity round, their investment converts into shares of that round's stock, at a price determined by whichever conversion mechanism (cap, discount, or both) is more favorable to them. Y Combinator introduced the SAFE in 2013 specifically to reduce the legal cost and negotiation time of early-stage investing compared to a convertible note. There's no interest accruing and no repayment obligation if the company never raises a priced round — the investor's capital is simply at risk, same as an equity investor's would be.
What is a valuation cap and how does it work?
A valuation cap sets the maximum company valuation at which the SAFE converts, regardless of what the actual priced round is valued at. If a SAFE has a $10 million cap and the company later raises a Series A at a $20 million pre-money valuation, the SAFE converts as though the company were valued at $10 million — meaning the SAFE holder gets twice as many shares per dollar invested as the new Series A investors do, at the same dollar price. The cap exists to compensate early investors for the risk they took before the company had a priced valuation at all; without it, an early $200K check would convert on exactly the same terms as a later $5M check into a company that's since de-risked substantially.
What is a discount rate on a SAFE?
A discount rate gives the SAFE holder a percentage reduction off the per-share price of the priced round, independent of any cap. A typical discount is 15–20%. If the priced round prices shares at $1.00 each, a SAFE with a 20% discount converts those shares at $0.80 — the investor gets more shares for the same dollar amount than someone buying directly into the round. Most SAFEs include both a cap and a discount, and the conversion mechanic uses whichever produces the lower effective price for the investor — the cap price and the discount price are calculated separately, and the smaller number wins.
Post-money vs pre-money SAFE: what is the difference?
This is the distinction that actually matters for founder dilution, and it's frequently misunderstood. A pre-money SAFE (the original 2013 structure) calculates the investor's ownership percentage based on the company's valuation before the SAFE round itself is added in — meaning if a founder stacks several pre-money SAFEs, the founder can't easily calculate their own resulting dilution until all the SAFEs convert together, because each SAFE's percentage depends on how many other SAFEs also converted.
In 2018, Y Combinator introduced the post-money SAFE, now the standard template, which fixes the investor's ownership percentage as a share of the company's valuation including the SAFE money itself. This makes each SAFE's dilution knowable at the moment it's signed — a $10 million cap SAFE for $500K always represents 5% of the post-money company, full stop, regardless of how many other SAFEs get stacked afterward. The tradeoff: post-money SAFEs are more precisely dilutive to the founder than pre-money SAFEs were, because every SAFE's percentage is now guaranteed rather than diluted by subsequent SAFEs. Founders raising on the post-money template should model total dilution across all outstanding SAFEs before signing the next one, not after.
How does a SAFE convert at the next round?
At a priced round — typically a Series A, though sometimes a later seed extension — every outstanding SAFE converts into preferred shares of that round, calculated using whichever of the cap or discount price is lower for that specific SAFE. Each SAFE converts independently based on its own terms; a SAFE from an earlier, smaller check with a lower cap converts at a better price than a SAFE signed later at a higher cap, even though both convert on the same day. The priced round's own investors negotiate the actual valuation with the founder; the SAFE holders don't participate in that negotiation, they simply convert according to terms already fixed at the time they invested.
Closing the round on record
Once a priced round is agreed, every outstanding SAFE's conversion terms — cap, discount, amount invested — need to be reconciled against the actual round terms to calculate the resulting cap table, and that reconciliation is exactly the kind of detail that gets disputed later if it isn't recorded clearly at the time. On Lengdon, SAFE terms attach to a deal room at the Brief stage and carry through Diligence and Terms, so the cap, discount, and conversion mechanics that were agreed to are part of the same record the eventual priced round closes against — not something reconstructed from old emails when the Series A term sheet arrives.
FAQ
What is the difference between a SAFE and a convertible note?
A convertible note is technically debt — it accrues interest and has a maturity date, and if the company never raises a priced round, the note may need to be repaid. A SAFE has no interest and no maturity date; it simply converts if a triggering event happens, and if it never does, there's no repayment obligation.
What does "post-money SAFE" mean for founder dilution?
It means the investor's percentage ownership is fixed and guaranteed at the moment the SAFE is signed, calculated as a share of the company's valuation including that SAFE. Founders should calculate the combined dilution of all outstanding post-money SAFEs before issuing a new one, since each one's percentage is locked in regardless of what comes after.
Can you raise on both a valuation cap and a discount?
Yes — most SAFEs include both, and the conversion uses whichever produces the lower effective price for the investor. If the cap converts more favorably than the discount would, the cap applies; if the discount would give a lower price, the discount applies instead.