SAFE Notes Explained: Caps, Discounts and MFN
A SAFE (simple agreement for future equity) lets investors put money in now and receive shares later, at the next priced round. It is fast and cheap to sign, which is why most pre-seed and many seed rounds use them. The terms decide how much of the company each SAFE becomes.
What is a SAFE?
A SAFE is a contract that gives an investor the right to shares in a future priced round, in exchange for money today. It is not debt: there is no interest and no maturity date. Y Combinator publishes the standard post-money SAFE forms and a user guide (YC SAFE documents), and most US startups use them.
| SAFE | Convertible note | Priced round | |
|---|---|---|---|
| What investors get now | A right to future shares | Debt that converts to shares | Shares |
| Interest and maturity | No | Yes | Not applicable |
| Valuation set now? | Only a cap, if any | Only a cap, if any | Yes |
| Legal cost and speed | Low, fast | Low to medium | Higher, slower |
| Typical stage | Pre-seed and seed | Pre-seed and seed | Seed and later |
What do caps, discounts and MFN mean?
- Valuation cap: the maximum valuation at which the SAFE converts. If the priced round is above the cap, the SAFE converts at the cap price and gets more shares.
- Discount: converts at a discount to the round price, for example 20% off.
- Most favoured nation (MFN): no cap or discount, but the investor can adopt better terms given to later SAFE investors.
- Pro rata side letter: an optional right to invest in the next round to keep their percentage.
The conversion math is worked through step by step in how SAFEs convert.
What is the difference between post-money and pre-money SAFEs?
YC’s current SAFE is post-money: the cap includes all SAFE money, so each investor’s ownership is simply the investment divided by the cap. A $1 million SAFE at a $10 million post-money cap buys about 10% before the priced round. The older pre-money SAFE made ownership depend on how much other SAFE money came in, which made dilution hard to see. With post-money SAFEs, founders absorb the dilution from each new SAFE, so track the total as you go.
| Investment | Post-money cap | Ownership |
|---|---|---|
| $500,000 | $8,000,000 | 6.25% |
| $500,000 | $10,000,000 | 5.0% |
| $1,000,000 | $10,000,000 | 10.0% |
Can Canadian startups use SAFEs?
Yes, and many do, often using Canadian versions adapted to Canadian corporate and securities law. Two issues need advice. First, tax treatment of SAFEs in Canada is less settled than in the US. Second, CCPC status: a Canadian-controlled private corporation must not be controlled by non-residents, and rights to acquire shares can count in that test (CRA on types of corporations). Large SAFEs from US investors can therefore affect the refundable SR&ED credit; see CCPC status and SR&ED.
Track the stack.
Each SAFE feels small. Together they can sell a large share of the company before the first priced round.
What should founders decide before raising on SAFEs?
- How much you need to reach the next milestone.
- A cap you can grow into by the priced round.
- Whether to offer a cap, a discount or both.
- Who gets pro rata rights.
- How the total SAFE stack will dilute you, modelled on the cap table.
Running the raise itself is covered in how to raise a seed round. Model the result with dilution and funding rounds and keep the cap table current.
Frequently asked questions
What is a SAFE?
A simple agreement for future equity: an investor pays now and receives shares at the next priced round. It has no interest or maturity date.
What is a valuation cap on a SAFE?
The maximum valuation at which the SAFE converts. If the round is priced higher, the SAFE converts at the cap price.
What is a post-money SAFE?
A SAFE whose cap includes all SAFE money, so ownership equals the investment divided by the cap.
Is a SAFE debt?
No. Unlike a convertible note, a standard SAFE has no interest and no maturity date.
Can Canadian startups use SAFEs?
Yes, often with Canadian versions. Get advice on tax treatment and the effect on CCPC status.
What is an MFN SAFE?
A SAFE with no cap or discount that lets the investor adopt better terms given to later SAFE investors.
Sources & further reading
Standard documents and tax rules change. These sources let you check the current terms directly.