What Is a SAFE Note? Meaning, Example and SAFE vs Convertible Note
A SAFE (simple agreement for future equity) is a short contract: an investor funds your startup now, in exchange for the right to shares later. It converts into shares when you raise a priced round. Y Combinator created the SAFE in 2013, and the post-money SAFE has been its standard since 2018 (source: ycombinator.com/safe).
Valuation cap and discount
- Valuation cap: the highest valuation at which the SAFE converts, which rewards the early investor if the company grows fast
- Discount: a percentage off the price paid by new investors in the priced round
- A SAFE can have a cap, a discount, both, or neither (an MFN SAFE, which takes the best terms you give later)
How a post-money SAFE converts: example
Illustrative example: an investor puts USD 100,000 into a post-money SAFE with a USD 1,000,000 valuation cap.
- Ownership on conversion: 100,000 ÷ 1,000,000 = 10%, measured just before the new money in the priced round
- If you issue several SAFEs, each one's percentage adds to founder dilution
Model every SAFE in the cap table before you sign the next one.
SAFE vs convertible note
- A convertible note is debt: it carries interest and has a maturity date when it must be repaid or converted
- A SAFE is not debt: no interest and no maturity date
- Both convert into shares at a future priced round, usually with a cap and or discount
Using SAFEs in Oman and the GCC
The standard SAFE was written for US companies. If your company is an Omani LLC, or registered elsewhere in the GCC, how it converts into shares and how enforceable it is depend on local company law and your company's documents. Have your lawyer adapt it, or use a local-law equivalent, before you sign.
Founder checklist
- Track every SAFE, its cap, discount and amount
- Model dilution at different priced-round valuations
- Watch the total: many small SAFEs can add up to a large stake
- Keep the cap table and the legal documents in step
Frequently asked questions
Simple agreement for future equity.
Is a SAFE a loan?No. Unlike a convertible note, a SAFE has no interest and no maturity date.
When does a SAFE convert?Usually at the next priced equity round, or on certain events such as a sale of the company, as set out in its terms.
Can an Omani company use a SAFE?Yes, when it is adapted to local company law and your company's documents by your lawyer, or replaced with a local-law equivalent.
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Written by Akram El-Karrar, CPA, from the work we do for startups every week.