Understanding SAFEs

Term Sheets Part VI: SAFEs

AuthorAuthor

Daniel Faierman & Chuck Cotter
May 21, 2025

✋ Hello there! Thanks so much for giving Term Sheet Pitfalls a shot! If you’re receiving this, you’re a founder, operator, investor, or friend who we think would enjoy this newsletter. If you missed our last few posts, you can find them here:

If you were forwarded this newsletter, subscribe HERE

Our commitment to you: brief, simple, valuable content that will empower you to get smarter on VC term sheets and fundraising strategy.

We can be reached here:

Daniel Faierman ➡️ [email protected] 

Chuck Cotter ➡️ [email protected]

We recommend replying with a “hi” in order to ensure that future posts don’t end up in spam world or unsubscribing at the bottom at your preference (no hard feelings).

Daniel Faierman is a Partner at Habitat Partners, an NYC-based early stage VC firm focused on pre-seed to Series A investments in the consumer and software ecosystems. Learn more about Habitat Partners on their website or notion page. Daniel has invested in numerous startups and previously operated and invested at organizations including PepsiCo, AB InBev, VMG Partners, and Selva Ventures. Daniel was a former Yale tennis 🎾 player & completed his MBA at the Stanford Graduate School of Business.

Chuck Cotter is a Partner in Morrison Foerster’s Emerging Company + Venture Capital practice group in Denver, with experience in the consumer products space, including food, beverage, personal care, beauty, and fashion. He has represented such companies and funds in over 200 🚀 consumer financing and M&A transactions. Chuck was a rugby player at Vassar College and completed his JD at Columbia Law School.

PS: Morrison Foerster and Habitat Partners took the partnership to the next level last week. Thanks to everyone who joined our inaugural NYC investor dinner. If you’d like to join our next one, let me know! 👇️ 

MoFo x Habitat + Deep Squad

Lastly, I don’t like being “sales-y” but one of my friends Jordan Williams has built something incredible. I learned this recently but with the rise of affiliates/influencers, brands are losing thousands of dollars monthly on coupon code leakage perpetuated by sites like Honey. Veeper’s software blocks all kinds of leakages from happening, saving brands from overapaying affiliaties and misattributing revenue. Here's a 3-min Loom video on how Veeper stops coupon code leaks. In the last few months, Jordan has partnered with brands like Cuts, Mejuri, Coterie, Faherty, Blueland, True Classic, Neuro Blendjet, Ilia, and many more, driving incredible ROI for all. At minimum, you should get a free audit. Anyways, here's the link to Try Veeper for Free.

Book a Call with Veeper's Founder/CEO - Jordan Williams 

SAFEs ⏯️ 

You’ll be glad to know that this week’s post is our shortest to date! Everyone seems to already be in MDW mode.

SAFEs and Convertible Notes have a ton in common. Thus, if you understand the ins and outs of Convertible Notes (a reminder to see last week’s post here), then grasping SAFEs should be quite straightforward… and if you truly understand convertible notes in your sleep, you should skip directly to section #4, which is a venn diagram comparing Convertible Notes and SAFEs.

In today’s post, we’ll dive into the following:

Priced vs. Non-Priced Rounds

We previously discussed approaches to valuation (DCF, comp analysis, etc). Remember that in a “priced financing,” VC(s) and founder(s) reach an agreed upon valuation for a company that equates to a specific price per share at which stock will be sold to purchasers (VCs, angels, etc). Priced financings often require execution of a myriad of legal documents (we discussed the long form closing documents in our first post) that are timely and costly.

Not all venture financing involves setting a specified valuation. Convertible notes and SAFEs are referred to as “non-priced” rounds because they do not explicitly set a share price and thus do not have an associated pre-money valuation. Instead, the share price is a function of a future priced financing round that triggers conversion of convertible notes or SAFEs into equity.

Main Pros of Non-Priced financings:

  • Enable founders to raise money more quickly with less legal expenses - SAFEs are very simple to document compared to priced financings

  • No round min or max - you can keep raising on SAFEs or stop but there’s no strict round size set by a lead

  • Assuming there are no pre-existing board members / investors with control provisions, if there are only SAFEs oustanding, a founder can sell their company without needing investor consent; the company can also issue additional options or enter into other financing agreements without needing the consent of investors

Main Con of Non Priced financings: future dilution can be a major question mark when leveraging SAFEs since valuation is not technically being set. It’s important for founders to scenario plan for future dilution by considering various valuation outcomes in future priced rounds (vs. valuation caps set in SAFEs/notes). We discussed the dangers of stacking up convertible notes in last week’s post (same logic applies for SAFEs).

History of the SAFE

The SAFE was originally developed as an alternative to convertible debt by Y Combinator around 2013. Prior to the inception of the SAFE, startups had raised funding through priced equity rounds. As the venture capital industry became more prominent by the early 2000s, a material seed ecosystem emerged, with investors participating more regularly in smaller/earlier rounds of financing.

Seed investors initially used convertible notes but grew wary of their debt-associated drawbacks: managing expiration dates with required repayments (or renegotiations), interest accruals, etc etc (convertibe note terms discussed in our last newsletter).

Y Combinator lawyers sought to create a straightforward “best of both worlds solution” that served as neither debt or priced equity. So they invented the SAFE (“Simple Agreement For Future Equity”), an instrument that promised future equity to investors.

While the original SAFE was a “pre-money SAFE,” Y Combinator went on to re-introduce a “post-money SAFE” in 2018, which gave investors clarity on their ownership potential at conversion. In case you’d like to dive deeper on the benefits of post- vs. pre- money SAFEs, this is a good quick read. YC’s website also provides downloads for SAFE docs.

As an investor, Daniel generally utilizes post-money SAFEs because they provide clarity on the equivalent post-money valuation Daniel will receive in the future (locking in his ownership level before his investment converts in a future priced equity round).

What is a SAFE?

A SAFE is an agreement between an investor and a company that converts into equity in the next financing round if certain conditions are met. In super simple terms, an investor is literally investing capital into the company with a promise that he or she will be awarded equity in the future under conditions outlined within the SAFE docs.

SAFEs convert into equity when conversion triggers are met. The equity received upon conversion is most commonly ‘preferred,’ sitting senior to common equity holders in the business. Conversion to equity generally occurs when the company raises a future priced equity round satifying the conditions of a qualified financing (typically a minimum round size threshold) OR in the event of a company sale/liquidation event.

It’s also possible that after financing a business via SAFE, one’s investment never converts. In the case that a company never raises additional equity and never sells itself or IPOs, SAFE holders would continue to hold their securities never realizing a return on their investment. We discuseed a few clauses in our post on convertible notes that address such a scenario… like voluntary conversion. In theory, a side letter featuring voluntary conversion could enable an investor to convert a SAFE even if a future triggering event never occurs.

SAFEs vs. Convertible Notes

We took our best stab at creating a venn diagram!

SAFEs: Video Simulation

Note: this is the same video that we showed for our post on Convertible Notes. The same steps would be applied for a SAFE with a specified discount and valuation cap.

If you enjoyed this article, feel free to view recent prior articles:

Helpful Sources:

Ongoing Term Glossary

Automatic Conversion: in the context of convertible notes (or SAFEs), a clause that triggers a convertible note to automatically convert into equity at maturity

Bridge Financing: when investors agree to provide temporary financing to secure a company’s cash balance before the company raises their next priced round - aka the bridge that gets you to your next priced round.

Capped Price: conversion price per share awarded to noteholder (or SAFE holder) if investor exercises valuation cap

Change in control: a significant shift in the ownership or control of a company, often triggering specific rights or obligations for investors (M&A most commonly)

Clawback provisions: provisions that give the company the right to buy back vested shares at the original issue price or at fair market value after dismissing an employee under defined circumstances (leaving for a competitor, severe misconduct, etc)

Co-Invest: triggered when a fund raises “one-off” new capital from LPs/investors (as opposed to pulling from existing permanent fund) to unlock ability to execute an investment; associated management fees and carry (if any) typically flow back to the fund or individual who raised the co-invest capital. Funds often give major LPs prioritized “co-invest“ rights, which gives such LPs the first rights to participate in the co-invest opportunity before others.

Comparable Company Analysis: a valuation methodology that entails identifying comparable companies and transactions to the company being valued as a means of deriving multiples that can be used to generate a landed valuation

Confidentiality: prevents the startup from disclosing the terms of a term sheet to outside parties (i.e., other investors, startups). This enables both parties to negotiate in good faith.

Convertible Note: a debt instrument that can be converted to equity based on the occurrence of certain events (most commonly during a priced equity financing round).

Conversion: convertible notes (and SAFEs) automatically convert into equity if certain triggers occur. The most common trigger that leads to the conversion of a convertible note (or SAFE) into equity is a priced equity financing round

Debt repayment terms: in the context of convertible notes, defines specifics associated with principal, interest rate, maturity date, and default provisions.

Definitive documents:  the legal contracts between the investors and the company that detail the terms of the transaction and are drafted by a lawyer

Dilution (D): losing a portion of your ownership as the company sells equity to investors

Discounted Cash Flow Analysis (DCF): a valuation methodology that entails forecasting the future cash flows of a business and discounting the cash flows by a determined cost of capital to derive an enterprise value

Discount: a discount is a term awarded to the convertible noteholder (or SAFE holder) that drives a reduction in the conversion price per share that they are awarded during a qualified financing. Discounts typically range from 10-30% with 20% being the most common.

Down Round: when the pre-money valuation of a future financing is lower than the post-money valuation of the prior financing; often seen as a negative sign for the company

Double-trigger: requires two events to occur to accelerate the completion of your vesting. The first trigger is the acquisition, and the second trigger is the founder or employee getting terminated by the acquirer without cause or good reason in a specified period (typically one year)

Employee Option Pool (EOP): stock that is reserved for existing and future employees to compensate, retain, and motivate workforce

Equity conversion terms: in the context of convertible notes, defines the specific event(s) that triggers conversion of debt to equity, the formula used during conversion (considering the impact of the valuation cap and/or discount – to be discussed), the type of equity received upon conversion by the note holder (common vs. preferred equity), and any associated rights the new equity holders will get after their convertible note is converted to equity (voting, dividends, etc).

Exclusivity: often referred to as a “no shop,” this provision locks parties into negotiating only with each other for a defined period (i.e., 30-60 days)

Exercise (options): buy options at the strike price

Fund Model: a forecasting exercise that a VC conducts to project what a successful fund will look like in terms of returns from each investment. VCs typically build a pathway to 3.0x net DPI

Indifference point: the price per share at which the noteholder or SAFE holder is indifferent between exercising the discount or valuation cap

Interest Rate & Payments: convertible notes often feature interest rates. Unlike a traditional loan, startups rarely pay the interest in cash to the convertible noteholder periodically. Instead, convertible notes accrue interest until the time of conversion.

Lead Investor: primary investor(s) (co-leads can exist) in a funding round that set terms and typically are writing the largest check(s); often take a board seat

Legally nonbinding: refers to the nature of term sheets. A signed term sheet does not legally mandate a deal be completed

Ownership (O): the % of a company a shareholder possesses prior to or post-closing of a financing

Prepayment: in the context of convertible notes, payment of the principal and accrued interest by the startup before the note matures. This is generally only allowed if there is a majority of supermajority vote in favor of prepayment by the noteholders.

Major Investor: refers to a participating investor in a financing that surpasses a certain check size threshold, unlocking certain rights. I.e., “all those who invest over $500k will be deemed major investors and shall receive information and pro rata rights”

Maturity: the date at which the debt (plus any accrued interest) is due for repayment. This is typically 12, 18, or 24 months from the issuance of the convertible note. We will talk about conversion momentarily but the norm for a convertible note is that it has converted into equity prior to the maturity date

Maturity Extension: in the context of convertible notes, this entails moving the maturity date back. A common alternative to repayment is for the company and noteholders to agree to an extension on the maturity date of the note

Multiple: a ratio that is calculated by dividing the valuation of an asset by a specific item on the financial statements

Multiple on Invested Capital (MOIC): compares the value of an investment on the exit date to the initial equity contribution

Non-priced financing: financing round in which founder and VC do not explicitly set a share price and thus do not set an associated pre-money valuation (i.e., convertible notes, SAFEs)

Option pool: an amount of common stock primarily reserved in the cap table for future employees (in certain cases, options can be pulled out of the option pool for existing employees/founders as well)

Optional conversion: in the context of convertible notes, entitles the noteholder to convert their note into equity if desired if the note is still outstanding on the maturity date

Post-Money Valuation (PO): the valuation of the company after the round size is invested by the VC(s)

Pre-Money Valuation (PM): what the investor is valuing the company at TODAY, prior to the investment

Priced round/financing: a round of financing in which the valuation and price per share of a unit of stock being sold is officially determined (as opposed to a SAFE or convertible note in which case the valuation is left officially undetermined)

Price Per Share (PPS): the cost of acquiring a share of company x, typically determined by pre-money valuation and fully diluted shares outstanding prior to close of financing

Principal: in the context of convertible notes, the amount of investment provided by the noteholder (investor) to the company through the convertible note. In an unfortunate scenario where the note never converts to equity (we will discuss this), the principal (plus any accrued interest) is what the company owes the noteholder (unless nuanced legal terms dictate otherwise). Assuming the note does convert to equity (the norm), the principal (plus any accrued interest) is the quantity used to calculate how many shares the note holder will receive upon conversion into equity.

Pro rata rights: give investors the right (but not obligation) to participate in future rounds of financing to maintain their initial level of percentage ownership in the company.

Pro rata on a dollar-for-dollar basis: gives the investor the right to invest an amount equal to or less than the amount invested in their first round à VC Z invested 200K in the seed round and has the right to invest 200k in the Series A

Pro rata on a fixed sum basis: least common, investors get the right to continue investing an amount as agreed upon that is decoupled from the investment amount. VC Z, who invested $1M in a seed, negotiates pro rata rights up to $700K - they will be able to invest up to $700K in each subsequent round of financing.

Pro Rata ROFR: gives particular investor(s) the right to another investors voluntarily waived pro rata in a future financing  

Qualified financing: in the context of convertible notes/SAFEs, the round size of an equity financing typically must meet a certain dollar threshold to trigger conversion into equity.

Repayment: in the context of convertible notes, the process of paying back the debt (plus any accrued interest) due to noteholders

Restricted Stock: company stock given to employees, usually as a bonus or additional compensation; does not have a strike price unlike options; usually awarded to company directors and executives and is subject to vesting

Round Size or Investment Amount (R): how much capital the founder is raising for the financing or VC round

RSUs: refers to an agreement by a company to issue employees shares on a future date. One RSU is the right to get one common share. RSUs, like options, are also subject to a time-based vesting schedule and can be trigger based; however, RSUs don’t have a strike price and are instead released directly to the recipient after vesting without any need to “exercise” or buy them; typically awarded to lower level employees than restricted stock

SAFE: an agreement between an investor and a company that converts into equity in the next financing round if certain conditions are met

Single-trigger: states that only one event must occur to accelerate the vesting of your equity. If the company is acquired, you gain complete ownership over all your options

Stock options: incentive mechanisms granted to employees, advisors, and consultants. Employees joining a VC-backed startup typically receive an option grant, which allows them to acquire company common shares in the future at a certain price by “exercising vested options”

Strike Price: the predetermined price an employee pays to exercise (aka purchase) their stock options and turn their stock options into actual shares of the company owned outright. Tax regulations (IRS Section 409a) require options grants to have a strike price equal to or above the fair market value of the underlying company stock on the date that the option is granted

‘Success disaster’: employees run the risk of being harmed financially for building a succeeding business that has grown in value significantly

Uncapped Note/SAFE: a convertible note (or SAFE) that lacks a valuation cap

Up Round: when the pre-money valuation of a future financing is higher than the post-money valuation of the prior financing; often seen as a positive sign for the company

Valuation: the process of deriving an enterprise value for a company

Valuation Cap: a valuation cap is an investor favorable terms that puts a ceiling on the conversion price at which a convertible note or SAFE would convert into the equity security sold at the qualified financing.

VC Valuation Method: a valuation methodology that entails projecting a company’s exit value in the future and a VC’s required MOIC in order to back into an implied valuation and ownership level at time of investment (starting with the future and backing into the present)

Vesting: the process of gaining ownership over granted stock options

Voluntary conversion: in the context of convertible notes, gives the investor (noteholder) the power to convert into equity whenever desired (even before maturity) under specified details, negating any prepayment potential

Warrants: when issued/contracted, give the warrant holder the right to buy a certain number of shares of the company’s common or preferred stock at a predefined price over a specified period

PM + R = PO ➡️ the pre-money valuation plus the round size = the post-money valuation

PO – R = PM ➡️ the post-money valuation minus the round size = the pre-money valuation

PM / FDSO = PPS ➡️ the pre-money valuation divided by shares outstanding = price per share

R / PO = O ➡️ round size divided by the post-money valuation is the amount of ownership acquired in a financing by participating investors

D / PO = Daniel’s O ➡️ Daniel’s investment divided by the post-money valuation is the amount of ownership Daniel is acquiring in a financing

Fundraising

Rule #1: Communicate early and consistently. Goal: build long term relationships with a roster of investors before you kick off a process.

Rule #2: Ask for help. The only way to get maximal value out of your cap table is by asking for help. Especially when times are tough, great investors can potentially be the difference between make or break.

Rule #3: Keep knocking. As hard as it is, keep communicating with rejectors and make them aware of your progress.

Is there a topic you’d like us to cover? Don’t be a stranger! Ever want to dive deeper on a topic in VC Investing or Law?

We can be reached here:

Daniel Faierman ➡️ [email protected] 

Chuck Cotter ➡️ [email protected]

If you enjoyed this post, please share on LinkedIn, X (fka Twitter), Meta and elsewhere. It goes a long way to support us! If you didn’t, don’t be scared to unsubscribe (we appreciate honest feedback).

📢 Follow the Term Sheet Pitfalls authors on LinkedIn:

✍️ Written by Daniel Faierman and Chuck Cotter 

Disclaimer: The information provided in this entry does not, and is not intended to, constitute legal or investment advice; instead, all information, content, and materials available in this entry are for general informational purposes only.