How SAFE Notes Convert into Equity
Early-stage investment via SAFEs (Simple Agreement for Future Equity) or Convertible Notes is designed to defer the valuation conversation until a "Priced Round" (like a Series Seed or Series A). When that round happens, your investor's cash "converts" into preferred shares.
The "Best Price" Rule
Almost all SAFEs and notes include a provision that allows the investor to convert at the more favorable price between the Valuation Cap and the Discount Rate:
- The Valuation Cap: A ceiling on the price. If the cap is $5M and you raise at $10M, the investor gets shares at the $5M price.
- The Discount Rate: A percentage off the new round's price. If the new round price is $1.00 per share and the investor has a 20% discount, they pay $0.80 per share.
Pre-Money vs. Post-Money Distinction
In the current standard, the Post-Money SAFE is the most common. It was introduced by Y Combinator to help founders understand exactly how much ownership they were giving away. In a Post-Money SAFE, the "Cap" refers to the valuation after all SAFEs have been added, making the dilution math much more transparent for the cap table.
Founder Insight: The "Note Stack"
Be cautious of "stacking" SAFEs. If you raise $500k on a $5M cap and another $500k on a $7M cap, the cumulative dilution can often exceed 15-20% before you even reach your Series A. Use this calculator to model the impact of a single note.
Investment Conversion FAQ
What if my next round valuation is lower than the cap?
If your next round valuation is below the cap, the cap is "out of the money." The investor will either use their Discount Rate or simply convert at the same price as the new investors, whichever is cheaper.
Does interest accrue on SAFEs?
No. SAFEs do not have an interest rate or a maturity date. Convertible Notes, however, are debt instruments that typically carry a 4-8% interest rate which converts into additional equity.