When you’re raising money for your startup, everyone throws fancy terms at you, equity, debt, convertible notes, dilution. And then someone says, “Why not raise on a SAFE?”

You nod politely, but deep down you’re thinking: What even is a SAFE?

Don’t worry. By the end of this article, you’ll know exactly what a SAFE note is, how it works, and whether it makes sense for your startup.

TL;DR

A SAFE (Simple Agreement for Future Equity) lets investors give you money today in exchange for shares later, usually when you raise your next priced round. It’s not a loan, there’s no interest, and it’s designed to be simple. The real impact comes from the terms, things like valuation caps, discounts, and whether it’s pre-money or post-money. Choose carefully, because these details decide how much equity you’ll still own tomorrow.

What is a SAFE Note?

SAFE stands for Simple Agreement for Future Equity. Think of it as a handshake deal (but written down properly) between you and your investor.

The investor gives you money today. Instead of getting shares immediately, they get a promise: whenever you raise a proper funding round in the future, they’ll get shares at that point.

It’s like telling your investor: “You believed in me early, so when I raise big money later, I’ll give you your fair share of the company then.”

Why Do Founders Use SAFEs?

Traditional fundraising is slow and expensive. You need lawyers, valuations, negotiations, and when you’re just starting out, that’s not only stressful but sometimes impossible.

A SAFE makes things faster:

• Speed → You don’t have to decide your valuation today.
  
• Low cost → Simple documents, no heavy legal bills.
  
• Flexibility → Perfect for angels or accelerators who just want to back you quickly.
  

For first-time founders, it’s often the cleanest way to raise early money.

How Does a SAFE Convert?

Here’s the key thing: a SAFE is not a loan. You don’t pay interest, and you don’t return the money. Instead, the SAFE converts into equity (shares) later.

That usually happens when you raise your next priced equity round (like Series A). The investor’s SAFE converts into shares at that time, often on better terms than the new investors.

Some SAFEs also convert if there’s an acquisition, IPO, or another big event. The exact “trigger events” depend on the agreement you sign.

The Two Big Terms You Must Understand

When using SAFEs, you’ll hear two magic words: Valuation Cap and Discount.

• A Valuation Cap is the maximum valuation at which your investor’s money converts. For example, if the cap is ₹30 crore and your Series A is at ₹60 crore, the SAFE investor still gets shares as if your company were worth ₹30 crore. That’s a sweet deal for them.
  
• A Discount is a percentage reduction on the price per share paid by new investors. For instance, if Series A investors pay ₹100 per share, and your SAFE investor has a 20% discount, they’ll get shares for just ₹80 each.
  

Sometimes a SAFE has both terms, sometimes just one.

Types of SAFE Notes

Not all SAFEs are created equal. Over time, founders and investors have used different variations of SAFEs, each with its own pros and cons. Let’s walk through them in simple language.

Valuation Cap Only SAFE- The most basic form is the Valuation Cap only SAFE. Here, your investor agrees to convert their money at a maximum valuation in the future. There’s no discount involved. This is good for founders because it avoids giving away extra pricing benefits, but investors still feel protected if your valuation shoots up.

Then there’s the Discount only SAFE, where no valuation cap is set. Instead, the investor simply gets a discount on the price new investors pay in the next round. This works well if you expect your valuation to stay reasonable, but investors might feel exposed if your startup suddenly grows very fast.

A more common variation is the Cap + Discount SAFE. This is the investor-friendly version that gives them the better of the two deals: either the capped valuation or the discount. Founders often agree to this to attract investors quickly, but you need to run the math carefully because it can lead to higher dilution.

Some SAFEs also come with a Most Favored Nation (MFN) clause. This means if you issue another SAFE later with better terms, the earlier investor can “upgrade” to those terms. It keeps investors happy, but it can create headaches for you if you raise multiple SAFEs with different conditions.

Another important distinction is between Pre-Money SAFEs and Post-Money SAFEs. In a pre-money SAFE, the calculation of ownership doesn’t include other SAFEs. This can leave investors unsure about their exact stake. In a post-money SAFE, the calculation is made after counting all SAFEs, so investors know exactly what percentage they’ll get. Post-money SAFEs give investors more clarity, but they can also mean more dilution for founders if you issue many of them.

There are also Uncapped SAFEs, which have no valuation cap and sometimes no discount. This is very founder-friendly, but risky for investors and therefore, less common.

In India, you might also hear about iSAFE notes, which are specially structured to comply with local laws. Unlike the U.S. version, iSAFE is often structured using compulsorily convertible preference shares (CCPS) to align with the Companies Act and FEMA regulations. These sometimes include tiny dividend rights just to stay compliant.

Finally, you’ll come across custom or hybrid SAFEs, which combine multiple protections like caps, discounts, MFN clauses, or even pro-rata rights (the right to invest more later to keep ownership percentage). These are negotiated on a case-by-case basis, but they lose the “simple” part of SAFE.

SAFE vs Convertible Note: What’s the Difference?

Both SAFEs and convertible notes help you raise money without deciding valuation upfront. The difference is that a convertible note is technically a loan, it has an interest rate and a maturity date. If things don’t go as planned, you might have to repay it.

A SAFE, on the other hand, is not debt. It doesn’t accrue interest, it doesn’t mature, and you never “owe” repayment. It’s simply a promise of future equity. That’s why SAFEs are considered more founder-friendly.

What Are the Risks for?

While SAFEs are simpler, they’re not risk-free. The biggest risks are:

• Setting a cap that’s too low, which could leave you giving away more equity than you planned.
  
• Stacking too many SAFEs before a priced round, which can suddenly wipe out a big chunk of your ownership when they all convert.
  
• Confusing investors about when or how conversion will happen. Always explain clearly.
  

Should You Use a SAFE?

A SAFE is perfect if you’re:

• Raising a small round from angels or accelerators
  
• Wanting to avoid valuation fights too early
  
• Needing money fast without heavy paperwork
  

But if you’re raising a larger round with institutional investors, they’ll likely push for a priced equity round.

Final Word

As a founder, your first investors often back you, not your spreadsheets. A SAFE helps you take that belief and turn it into a quick, fair deal.

But remember: the word “SAFE” alone doesn’t tell you much. The real story is in the terms, cap, discount, pre- vs post-money, MFN clauses, and compliance if you’re in India. Choose carefully, because those fine print details decide how much of your company you’ll still control tomorrow.

-By Katyayni Pandey, Trainee Associate- Corporate Law, Ductus Legal