SAFE Notes Explained: Cap, Discount, MFN and Dilution
Safe notes explained in plain English: how a SAFE works, what cap, discount and MFN mean, and how to calculate your dilution step by step before you sign one.
Safe notes explained: a SAFE (Simple Agreement for Future Equity) is a contract in which an investor gives your company money now and receives shares later, usually when you raise your first priced round. Until that round happens, the investor owns no shares, and you owe no interest and no repayment date.
People often say "safe notes", but a SAFE is not a note, because a note is a loan and a SAFE is not. Y Combinator, the US startup accelerator, created the SAFE in 2013, and its current post-money version has been the Y Combinator standard since 2018. This guide explains the terms you will see in a SAFE, shows the arithmetic in a worked example, and lists what you will meet instead if your company is outside the US.
Safe notes explained from the ground up
A SAFE solves a timing problem. Early in a company's life, nobody can say what it is worth, and negotiating a valuation takes time and legal cost. A SAFE lets the investor wire money today and postpones the valuation question to a later round, when more evidence exists.
When the company raises a priced equity round (a round where new investors buy shares at a stated price per share), the SAFE converts into shares automatically. Y Combinator describes the conversion as automatic, after which the SAFE ends. The investor receives a type of share that new investors in that round also receive, at a price that rewards them for investing early.
Three features define a SAFE. It carries no interest. It has no maturity date, so nothing falls due on a fixed day. And it is not debt, so the investor cannot demand the money back in the way a lender can.
The four terms that decide what the investor gets
Valuation cap
The valuation cap is the highest company valuation at which the SAFE converts. If the next round values the company above the cap, the SAFE investor still converts as if the company were worth only the cap. Y Combinator states the rule for its post-money SAFE simply: the ownership sold equals the investment divided by the valuation cap.
Discount
A discount gives the SAFE investor a lower share price than the new investors pay. Y Combinator says discounts are commonly 10 to 20 percent. A 20 percent discount means the SAFE converts at 80 percent of the round price.
Most favoured nation (MFN)
An MFN SAFE has no cap and no discount. Instead, it takes the cap or discount of any SAFE the company issues later. The investor accepts open terms now and gets the best terms any later SAFE investor negotiates.
Pre-money and post-money
The words describe how the cap is counted. In a pre-money SAFE, the cap is measured before the SAFE money is added, so it excludes other SAFEs. In a post-money SAFE, the cap is measured after all the money raised on SAFEs. Y Combinator explains that the post-money cap includes all SAFE money, the existing options and the option pool that exists before the round, but not a new or bigger pool created in that round. Because of this, a post-money SAFE tells each investor exactly what percentage they hold before the round, and the founders absorb the dilution from every additional SAFE.
| Term | What it does | Who it helps |
|---|---|---|
| Valuation cap | Sets a ceiling on the valuation used to convert | Investor, when the company grows fast |
| Discount | Converts at a lower price than the new round | Investor, whatever the valuation |
| MFN | Copies better terms from later SAFEs | Investor who invests with no cap |
| Post-money cap | Fixes the investor's percentage before the round | Investor, and founders who want clarity |
Worked example: a post-money SAFE with a cap
Example. Two founders hold 1,000,000 shares in total. An angel investor puts €500,000 into a post-money SAFE with an €8,000,000 cap and a 20 percent discount. There are no other SAFEs and no option pool, to keep the numbers clear.
Step 1, the investor's percentage before the round. Ownership equals the investment divided by the cap: €500,000 ÷ €8,000,000 = 6.25 percent.
Step 2, how many shares that is. The SAFE holder must end with 6.25 percent of all shares, so the SAFE shares S satisfy S ÷ (1,000,000 + S) = 0.0625. Solving gives S = 1,000,000 × 0.0625 ÷ 0.9375 = 66,667 shares.
Step 3, the price per share at the cap. €8,000,000 ÷ (1,000,000 + 66,667) = €7.50 per share. Check: 66,667 × €7.50 = €500,000.
Step 4, the next round. New investors put in €2,000,000 at €10.00 per share, which gives them 200,000 shares. The discount price is €10.00 × 0.80 = €8.00, which is higher than the cap price of €7.50. The SAFE converts at the better price for the investor, which is the cap price. At €8.00 the investor would have received only 62,500 shares.
Step 5, who owns what after the round. Total shares are 1,000,000 + 66,667 + 200,000 = 1,266,667.
| Holder | Shares | Ownership after the round |
|---|---|---|
| Founders | 1,000,000 | 78.95% |
| SAFE investor | 66,667 | 5.26% |
| New investors | 200,000 | 15.79% |
| Total | 1,266,667 | 100% |
The SAFE investor held 6.25 percent before the round and 5.26 percent after it, because the new shares dilute everyone. To see how that works in general, read what equity dilution is.
Pre-money comparison. Take the same €8,000,000 cap as a pre-money cap. The price is €8,000,000 ÷ 1,000,000 founder shares = €8.00, so €500,000 buys 62,500 shares, or 62,500 ÷ 1,062,500 = 5.88 percent before the round. The post-money version gives 6.25 percent. The same number in the word "cap" gives the investor a different share, and this is why you must check which version you sign.
Track every SAFE on your cap table
A SAFE is not a share, yet it will become one, so every SAFE you sign belongs in your planning. Several SAFEs with different caps make the final ownership hard to see until the round arrives. Our guide to the cap table explains how to record them.
What founders meet outside the US
The SAFE is a US instrument, and other markets use similar tools under other names. Only the ones below were checked against published sources.
- United Kingdom: the Advance Subscription Agreement (ASA). The investor pays now and receives shares later, usually at a qualifying round, with a discount and a valuation cap. It is not debt and does not accrue interest. It usually has a longstop date, a backstop after which the advance converts even if no round has happened.
- Germany and the Netherlands: the convertible loan is the usual tool. It is a loan with interest and a maturity date that converts into shares. The convertible notes guide covers how it works.
The legal treatment of each instrument differs by country, so ask a local lawyer which one fits your company.
Risks a SAFE hides from first-time founders
- Stacked dilution. Every SAFE converts at the next round, so five small SAFEs together can take a large share before you have sold a single priced share.
- Caps set low. A low cap gives the investor a bigger share if the company is worth more later.
- No deadline. A SAFE has no maturity date, so it can sit unconverted for years while the investor waits.
- Different versions. Pre-money and post-money SAFEs behave differently, as shown above.
Frequently asked questions
Is a SAFE debt or equity?
A SAFE is not debt. It has no interest and no maturity date. It is also not equity yet, because the investor holds no shares until a priced round converts it.
What happens to a SAFE if I never raise a priced round?
Nothing happens on a fixed date, because there is no maturity. The SAFE stays open until a priced round, a sale of the company, or a shutdown. The exact payout in a sale or shutdown depends on the terms of the SAFE you signed.
What is the difference between a cap and a discount?
A cap limits the valuation used for conversion, while a discount reduces the share price by a percentage. Many SAFEs have one of them, and when a SAFE has both, the investor takes whichever gives the lower price per share.
Should I use a pre-money or post-money SAFE?
Y Combinator has used the post-money SAFE as its standard since 2018, so most investors expect it. It gives each investor a fixed percentage before the round. Ask your lawyer to confirm which version a document is before you sign.
Can I use a SAFE if my company is not in the US?
You can ask, but the SAFE was written for US companies and may not fit your local company law. Local equivalents such as the UK ASA or the convertible loan exist for this reason. A lawyer where your company is registered can tell you what works.
This is general education, not legal or tax advice. Instrument names, tax treatment of equity and the formalities of issuing shares differ by country. Check the details with a lawyer where your company is registered.
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