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SAFEs and convertible notes are early-stage financings in which investors put money in now and receive stock later, usually at a price set by the company's first priced round. They are most common at the pre-seed and seed stage, when a company needs capital before it can support a valuation investors will accept.
We represent companies and their founders in these rounds. The documents are short and often standard forms, but a few choices in them decide how much of the company the founders keep. Our articles on SAFEs and convertible notes explain the basic terms.
Attorney
Terms We Negotiate
Valuation Cap
The highest valuation used to price the investor's shares at conversion, usually the term with the largest effect on founder ownership.
Conversion Discount
A percentage off the price new investors pay in the next round, used alone or with a cap.
Most-Favored-Nation Terms
If the company later gives other investors better terms, an earlier investor can take them too.
Pro Rata Side Letters
The right to buy into the round where the SAFE converts, so the investor can hold its percentage.
Choosing Between a SAFE and a Note
A convertible note is a loan, so the investor ranks ahead of stockholders if the company fails and has leverage when the note comes due. If a priced round looks far off, we negotiate in advance what happens at maturity, such as an extension or conversion at a set price. A SAFE has no interest or maturity date, which is much of its appeal to founders.
Side Letters and MFN Clauses
A pro rata right, information right or board observer seat given to one investor may, depending on the most-favored-nation (MFN) wording in other SAFEs, have to be offered to the rest. Side letters that nobody tracked are a frequent diligence finding, so we keep a record of every one.
Conversion in the Priced Round
When the company closes a priced round, its SAFEs and notes generally convert at the same time, each at whichever of the cap price and the discounted round price gives the investor more shares. The new investors usually also want an option pool sized before their money comes in. We build the conversion model before the term sheet is signed, so founders know the cap table they will have after closing.
How an Early Round Comes Together
Choose the Instrument
We compare a SAFE and a note against the company's runway, investors and timing for a priced round.
Model the Dilution
We run every SAFE and note already outstanding so founders see their ownership after conversion.
Set the Terms
Cap, discount, MFN and pro rata rights, plus interest and maturity for a note.
Securities Compliance
We confirm the offering exemption and prepare the Form D and state notice filings.
Close and Track
Investors sign and fund, and we record each instrument for the conversion math later.
Frequently Asked Questions
Have a question that isn't answered here? Call us at (817) 631-8842 or send a message.
Ask a QuestionWhat is the difference between a post-money SAFE and a pre-money SAFE?
In a post-money SAFE, the valuation cap counts the money raised on every SAFE, so each investor knows its percentage going into the priced round. Later SAFEs dilute the founders and other existing holders, not earlier SAFE holders. In the older pre-money SAFE, later SAFEs diluted earlier ones. Y Combinator's current standard SAFE forms are post-money.
How much of the company will our SAFE investors end up owning?
With a post-money SAFE, each investor's share is roughly its investment divided by its cap. Those percentages add up across every SAFE outstanding, and the founders absorb the total before the priced round's investors and any new option pool dilute everyone again. We model all of them together before each new SAFE is signed.
Can we change the terms of SAFEs or notes after they are signed?
Usually, with the consent the documents require. Some forms let a defined majority of holders approve an amendment that binds the whole group, while others need each investor to sign. Companies amend to extend a maturity date, correct a drafting error or line up inconsistent instruments before a priced round.
Do SAFEs and convertible notes have to comply with securities laws?
Yes. Both are securities, so the company must sell them under an exemption from registration, usually Regulation D, and make the filings that exemption requires. See our page on private offerings and securities compliance.
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