1 What is a SAFE note?

A SAFE note is a type of convertible security, which means that it can be converted into equity shares in the future. Unlike a convertible note, which is a debt instrument that accrues interest and has a maturity date, a SAFE note is not a loan and does not have any interest or repayment obligations. A SAFE note is simply an agreement that grants investors the option to buy equity in your company at a discounted price, based on a predefined trigger event, such as a Series A round or an acquisition.

2 Why use a SAFE note?

A SAFE note can be an attractive option for both founders and investors, offering several benefits over other fundraising methods. It is easy to create and execute, as it does not require complex valuation calculations, legal fees, or extensive negotiations. Moreover, a SAFE note allows founders to defer the valuation of their company until they have more traction and data, which can increase the chances of getting a higher valuation in the future. They can also raise multiple rounds of funding using different SAFE notes without worrying about dilution or conflicts among investors. Lastly, a SAFE note aligns the interests of both parties, as investors get a lower price for their equity while founders retain more control and ownership of their company.

4 How to negotiate a SAFE note?

A SAFE note is a contract that requires two main terms to be negotiated with investors: the valuation cap and the discount rate. The valuation cap is the maximum valuation of your company at which the SAFE note will convert into equity, and the discount rate is the percentage by which the SAFE note holders will get a lower price for their equity than new investors in a conversion event. For example, if you raise a SAFE note with a $10 million valuation cap and a 20% discount rate, and then you raise a Series A round at a $20 million valuation, the SAFE note holders will get equity at a $8 million valuation ($10 million cap minus 20% discount). The valuation cap and the discount rate are inversely related, so finding a balance between these two terms that is fair and reasonable for both parties is key. To negotiate a successful SAFE note, you should do your research to understand what's appropriate for your industry, stage, and traction; be flexible and adjust your terms based on investor feedback; and be transparent about your fundraising strategy, goals, and terms. Additionally, you should disclose any existing or planned SAFE notes that could affect your valuation and dilution. Communicating clearly with investors about any changes or updates in your situation is also important.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?