SAFE Note Review Guide
A SAFE note is a 5-page document with billion-dollar implications. Y Combinator's standardization made the form famous; what didn't standardize is what founders and investors negotiate inside the few blanks. Seven clauses determine the price you're effectively paying.
What it is
A SAFE (Simple Agreement for Future Equity) is an investment instrument popularized by Y Combinator that gives an investor the right to receive equity in a future priced round, without setting a valuation today. The investor wires money now; the conversion happens at the next priced equity round.
Two main flavors today: pre-money SAFEs (the original 2013 form) and post-money SAFEs (the YC update from 2018). They behave very differently in dilution math; converting pre-money SAFEs cause founder dilution differently than post-money.
SAFEs are short and look uniform but have meaningful negotiable terms: valuation cap, discount, most-favored-nation provisions, pro-rata rights, and dissolution treatment. The defaults often favor whichever side drafted them.
Common clauses to check
- [ 01 ]
Valuation cap
Maximum company valuation at which the SAFE converts. Lower cap = better for investor (more equity); higher cap = better for founder (less dilution).
What to look for- Cap stated as a specific dollar amount (e.g., $10M).
- Whether cap is pre-money or post-money — affects the math substantially.
- Whether the cap is the only price floor or there's also a discount.
Red flags- No valuation cap (uncapped SAFE) — investor gets unlimited downside protection but no upside discount.
- Cap that doesn't match the round being raised (e.g., $5M cap when company is raising at $50M).
- Hidden post-money treatment in a pre-money template (read the conversion math carefully).
- [ 02 ]
Discount
Discount applied to the next round's price — typically 10-25%. Investor pays less per share than new investors.
What to look for- Discount stated as a percentage (e.g., "20% discount" means SAFE holder pays 80% of priced round price).
- Whether cap and discount both apply (whichever is more favorable for investor).
- Discount-only SAFEs (no cap) — common for early seed.
Red flags- Discount over 30% — unusually generous to investor.
- Discount paired with very low cap that always wins — discount becomes irrelevant.
- [ 03 ]
Pre-money vs. post-money
Whether the valuation cap is measured pre- or post-money of the SAFE itself. Critical distinction with massive dilution implications.
What to look for- Explicit statement: "This SAFE is post-money" or "pre-money."
- Calculation worksheets showing dilution math, especially when multiple SAFEs convert.
- If post-money: all SAFEs and notes considered "in" the valuation cap, locking founder dilution.
Red flags- Mixed pre-money and post-money SAFEs in the same round — complex conversion math, often unfavorable to founders.
- Pre-money SAFE with very low cap when raising a large round — surprise dilution.
- [ 04 ]
Conversion mechanics
Exactly when and how the SAFE converts to equity. Standard conversion is on the next priced equity round.
What to look for- Definition of "Equity Financing" that triggers conversion (typically priced preferred round).
- Conversion to the same class of preferred stock issued in the trigger round.
- Treatment in change-of-control or IPO before conversion — "Liquidity Event" and "Dissolution Event" sections.
Red flags- Conversion only on "qualified financings" with high minimum thresholds — may never happen.
- Conversion at fixed price rather than discounted — not a real cap.
- Side letters that modify conversion mechanics inconsistently across investors.
- [ 05 ]
Most-Favored Nation (MFN)
Right to elect terms of any later SAFE issued by the company, if those terms are more favorable.
What to look for- Whether the SAFE includes MFN (post-money YC default doesn't; some pre-money do).
- Mechanics — elect within X days of notice, in writing, all-or-nothing.
- Carve-outs for non-comparable instruments.
Red flags- MFN that lets investor cherry-pick favorable terms while ignoring unfavorable ones.
- MFN with vague trigger that creates ongoing administrative burden.
- [ 06 ]
Pro-rata rights
Right to invest in future rounds to maintain percentage ownership.
What to look for- Pro-rata participation right in next round (typically up to investor's current percentage).
- Side letter rights — common to put pro-rata in a separate document.
- Whether pro-rata applies to all subsequent rounds or just the trigger round.
Red flags- Pro-rata rights demanded by small investors that compound dilution issues for founders.
- Pro-rata that doesn't expire — creates perpetual dilution overhang.
- Pro-rata at the SAFE valuation cap, not the new round's price.
- [ 07 ]
Dissolution & liquidity event treatment
What happens if the company dissolves, gets acquired, or goes public before the SAFE converts.
What to look for- Dissolution: SAFE pays out 1x the purchase amount as a liquidation preference (standard).
- Liquidity Event (acquisition before conversion): SAFE holder elects between (a) cash equal to purchase amount, or (b) shares converted at the cap.
- Whether SAFE participates in distributions or just gets the principal back.
Red flags- No dissolution priority — SAFE money is just gone in a wind-down.
- Liquidity Event conversion that doesn't optimize for investor (no choice between cash and shares).
- Multiple-of-purchase liquidation preferences — non-standard.
Other watchouts
- Information rights post-investment.
- Major investor designation thresholds and rights tied to it.
- Board observer rights from a SAFE — uncommon but happens.
- Side letter terms not captured in the SAFE itself.
- Tax treatment — SAFEs have ambiguous tax status (debt? equity?).
- Securities law compliance (Rule 506, accreditation requirements).
- Cap table modeling — how SAFEs interact with each other and option pool expansions.
- Whether dissolution priority is satisfied by holding back cash or just by ranking.
Frequently asked questions
- What's the difference between pre-money and post-money SAFE?
- A post-money SAFE's valuation cap measures the company's value AFTER all SAFEs convert (including this one). A pre-money SAFE's cap measures BEFORE conversion. Post-money is more predictable for founder dilution math but typically more dilutive than pre-money at the same cap. Y Combinator's 2018 update made post-money the default form.
- Are SAFE notes debt or equity?
- Neither, technically. They're a contract for future equity. Tax authorities have not definitively classified them. They don't accrue interest like convertible notes; they have no maturity date. They convert into equity on a triggering event.
- Should I sign an uncapped SAFE?
- As an investor, generally no — you have unlimited dilution exposure if the company succeeds. As a founder, you may prefer it for friendly money where you don't want to commit to a valuation. Discount-only SAFEs (no cap) are common in earliest pre-seed but require extreme alignment.
- Should SAFEs include pro-rata rights?
- From the investor side, often yes for material checks. From the founder side, smaller checks shouldn't get pro-rata because it complicates future rounds. Many companies put pro-rata in side letters above a check size threshold.
- What happens if the company gets acquired before the SAFE converts?
- The SAFE's Liquidity Event provisions kick in. Standard: investor elects between (a) repayment of the original purchase amount, or (b) conversion at the valuation cap and participation in the acquisition. The choice depends on the acquisition price.
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