Simple agreement for future equity (SAFE) notes are a way that startups raise early capital. The private capital software company Carta found that in the third quarter of 2024, 89% of all prepriced investments on its platform were structured as SAFEs. Founders use SAFE notes to move fast and investors use them to get early exposure. SAFEs have largely replaced convertible notes for startups’ pre-seed and seed rounds.

SAFE notes shape ownership, dilution, and outcomes once the company reaches the point of pricing an equity round. Below, we’ll explore how SAFE notes work, why startups use them, and when they convert.

What’s in this article?

• What is a SAFE note?
  
• How does a SAFE note work?
  
• Why do startups use SAFE notes instead of priced equity rounds?
  
• When does a SAFE convert into equity?
  
• How do valuation caps and discounts work in a SAFE?
  
• What are the different types of SAFE notes?
  
• How are SAFE notes different from convertible notes?
  
• How Stripe Atlas can help
  

What is a SAFE note?

A SAFE allows a startup to raise money without setting a valuation. An investor gives the company capital in exchange for the right to equity in the company in the event of a priced fundraising round.

It isn’t a loan, and the business doesn’t owe the investor cash back at a future point. So a SAFE doesn’t accrue interest, require repayments, or come with a maturity date.

How does a SAFE note work?

A SAFE moves capital quickly and delays the details of ownership until there’s a clear moment to set a valuation on the business.

Here’s how a SAFE note works:

• Money now, equity later: The investor invests capital up front, and the company agrees to issue equity in the future once a defined trigger event occurs. No shares are issued at signing so ownership stays unchanged until conversion.

• Passive until a trigger event: The SAFE sits on the capitalization (cap) table as a future equity claim until a specific event, often a priced equity round that meets the minimum size.

• Automatic conversion: The SAFE converts into the shares issued in that triggering round, which are typically preferred stock. (Holders of preferred stock have a higher claim to dividends or asset distribution compared to holders of common stock, although they receive fewer voting rights.) The number of shares is calculated using the SAFE’s conversion terms rather than the price paid by new investors.

• Defined outcomes for exits: If the company is acquired or goes public, the SAFE note will usually convert into either equity or a cash payout, depending on the terms of the agreement.

Why do startups use SAFE notes instead of priced equity rounds?

SAFE notes allow companies to raise capital without slowing down to solve problems that don’t yet have clean answers. They offer the following benefits:

• Fast to close: SAFEs strip fundraising down to the essentials, which means fewer terms to negotiate and fewer documents to draft.

• Low legal and administrative cost: SAFEs rely on standardized agreements, which keep overhead low.

• No early valuation pressure: Early-stage companies might not have enough data to support a defensible valuation. SAFEs postpone that decision until pricing can be more predictable.

• Flexible fundraising: SAFEs allow rolling closes. That means businesses can accept additional capital before a funding round closes and founders can raise capital at different times without reopening negotiations. This works especially well when capital accumulates gradually rather than all at once.

• Cleaner early governance: SAFE investors don’t receive board seats or control rights at signing. Founders retain control until equity is formally issued in a priced round.

• Rewards for risk-taking: Investors accept uncertainty regarding timing and ownership in exchange for favorable conversion economics later. That makes SAFEs well suited to pre-seed and seed stages, where outcomes are still highly variable.

When does a SAFE convert into equity?

A SAFE note converts into equity when a specific event creates a clear price for the company’s shares. Here are some common scenarios when a SAFE note might convert.

Qualified equity financing

A common trigger is a priced equity round that meets the minimum size defined in the SAFE. When that round closes, the SAFE automatically converts into the same class of shares issued to new investors. The number of shares issued is based on the SAFE’s terms rather than the valuation of the round. Valuation caps (maximum valuations for converting SAFEs, which protect early investors), discounts (which incentivize early-stage investors to take on higher risk), or both determine the effective price the SAFE investor pays.

Acquisition

If the business is acquired before it raises another equity round, this typically means either a cash payout or conversion into equity immediately before the sale, depending on which outcome yields more value for the SAFE holder.

Initial public offering (IPO)

In a public offering, SAFEs generally convert into common stock. This ensures SAFE holders participate as shareholders once the company is publicly traded.

If none of these events occur, the SAFE note remains outstanding. There’s no maturity date that forces conversion or repayment, which means SAFEs place meaningful risk on investors.

How do valuation caps and discounts work in a SAFE?

Valuation caps and discounts are how SAFEs reward early risk-taking without locking in a valuation too soon.

Valuation caps set the maximum company valuation used to calculate the SAFE’s conversion price. If the priced round values the business above the cap, the SAFE converts as if the valuation were equal to the cap, resulting in more shares for the SAFE holder. Caps ensure early investors benefit if the company’s value grows quickly between the SAFE and the next round. The lower the cap is relative to the round valuation, the larger the ownership stake the SAFE converts into.

Discounts give the SAFE holder a percentage reduction on the share price paid by new investors in the priced round. A 20% discount, for example, means the SAFE converts at 80% of the new investor price.

When a SAFE includes both a cap and a discount, the conversion uses whichever produces the lower price per share for the investor. In practice, fast-growing companies tend to trigger the cap, while flatter valuations make the discount more relevant. Many SAFEs include a valuation cap without a discount. This structure is simpler and easier to model.

What are the different types of SAFE notes?

A key difference between SAFE notes is whether an investor’s ownership percentage is fixed relative to other SAFEs or subject to potential future dilution due to additional SAFE investors.

Here are the different types of SAFE notes:

• Valuation cap SAFEs: These include a valuation cap but no discount, setting a maximum price for conversion. This is a common SAFE structure.

• Discount-only SAFEs: These offer a fixed-percentage discount on the next round’s share price without a valuation cap. They’re less common and typically used when setting a cap feels overly speculative.

• Cap-and-discount SAFEs: These include both mechanisms, with conversion based on whichever yields a lower share price. This is a less common structure.

• MFN SAFEs: These include a most-favored-nation (MFN) clause that allows early investors to adopt better terms granted to later SAFE investors.

Each of these can be either post-money or pre-money SAFEs. Post-money SAFEs define ownership after accounting for all SAFEs issued before the priced round and lock in the percentage of the company the SAFE will convert into, regardless of how many additional SAFEs are raised later. Pre-money SAFEs calculate conversion before new SAFE capital is included, which can lead to unexpected dilution when multiple SAFEs convert together. They’re largely considered outdated and rarely used in new financings.

How are SAFE notes different from convertible notes?

SAFE notes and convertible notes are both common types of convertible securities, also known as convertible instruments or “convertibles.” They enable founders to raise capital without setting a valuation.

But while SAFE notes and convertible notes solve similar capital problems, they do so in fundamentally different ways:

• Equity contract vs. debt: A SAFE is a contractual right to future equity, not a loan. A convertible note is debt that can convert into equity, which means the company technically owes money until conversion.

• No interest vs. interest accrual: SAFEs don’t accrue interest so the conversion amount stays fixed. Convertible notes carry interest, which increases the number of shares issued when conversion happens.

• No maturity date vs. a deadline: SAFEs have no maturity date and don’t force a repayment or renegotiation on a fixed timeline. Convertible notes mature, which creates pressure to raise another round or extend the note.

• Founder flexibility: SAFEs give founders room to operate if fundraising takes longer than expected. Convertible notes give investors power if timelines slip.

• Investor risk profile: SAFE investors accept more uncertainty because repayment isn’t guaranteed and there’s no set timeline for conversion. Convertible note investors generally take on slightly less risk because they hold creditor status until conversion.

Convertible notes still appear in bridge financings or later-stage situations where short-term capital needs clearer repayment protections. But SAFEs have largely replaced convertible notes for pre-seed and seed rounds.

How Stripe Atlas can help

Stripe Atlas sets up your company’s legal foundations so you can fundraise with SAFEs, open a bank account, and accept payments within two business days from anywhere in the world.

Join 75K+ companies incorporated using Atlas, including startups backed by top investors like Y Combinator, a16z, and General Catalyst.

Applying to Atlas

Applying to form a company with Atlas takes less than 10 minutes. You’ll choose your company structure, instantly confirm whether your company name is available, and add up to four cofounders. You’ll also decide how to split equity, reserve a pool of equity for future investors and employees, appoint officers, and then e-sign all your documents. Any cofounders will receive emails inviting them to e-sign their documents, too.

Fundraising with SAFEs

After incorporating your C corporation (C corp), Atlas helps you obtain board approval to fundraise and send SAFEs to investors. After signing a SAFE, your investors can transfer funds to the bank account of your choice.

Accepting payments and banking before your EIN arrives

After forming your company, Atlas files for your Employer Identification Number (EIN). Founders with a US Social Security number, address, and cell phone number are eligible for IRS expedited processing, while others will receive standard processing, which can take a little longer. Additionally, Atlas enables pre-EIN payments and banking, so you can start accepting payments and making transactions before your EIN arrives.

Cashless founder stock purchase

Founders can purchase initial shares using their intellectual property (e.g., copyrights or patents) instead of cash, with proof of purchase stored in your Atlas Dashboard. Your IP must be valued at $100 or less to use this feature; if you own IP above that value, consult a lawyer before proceeding.

Automatic 83(b) tax election filing

Founders can file an 83(b) tax election to reduce personal income taxes. Atlas will file it for you—whether you are a US or non-US founder—with USPS Certified Mail and tracking. You’ll receive a signed 83(b) election and proof of filing directly in the Stripe Dashboard.

World-class company legal documents

Atlas provides all the legal documents you need to start running your company. Atlas C corp documents are built in collaboration with Cooley, one of the world’s leading venture capital law firms. These documents are designed to help you fundraise immediately and ensure your company is legally protected, covering aspects like ownership structure, equity distribution, and tax compliance.

$50K in partner credits and discounts

Atlas collaborates with top-tier partners to give founders exclusive discounts and credits. These include discounts on essential tools for engineering, tax, finance, compliance, and operations from industry leaders like AWS, Carta, and Perplexity. We also provide you with your required Delaware registered agent for free in your first year. Plus, as an Atlas user, you’ll access additional Stripe benefits, including up to a year of free payment processing for up to $100K in payment volume.

Learn more about how Atlas can help you set up your new business quickly and easily, or get started today.