Exploring The Different Types of SAFE Notes

Since the invention of SAFE notes by Y Combinator in 2013, they have always remained one of the most popular tools in the startup ecosystem for very early financing. With continuous evolution in the use of SAFE notes, different variations have emerged when framing them to match the needs and concerns of both startups and investors. This blog explores different types of SAFE notes, their unique features, and how they take care of various financing scenarios.
What Are the Different Types of SAFE Notes?
The SAFE notes make it easier to raise capital for startups. They do not represent any form of debt, and thus they neither accrue interest nor have a maturity date. Alternatively, they convert at some future financing round, usually when the startup raises its next priced equity round. Key types of SAFE notes include the Pre-Money SAFE and the Post-Money SAFE; furthermore, there are also other custom variations that might be negotiated between the startup and investors.
1. Pre-Money SAFE
The Pre-Money SAFE was introduced as the original form by Y Combinator. It values the ownership of investors’ equity before the addition of new money in the next financing round.
Key Features:
- Valuation Cap: The valuation cap will set the maximum company valuation at which the SAFE note automatically converts into equity. Provided the company’s value in the next financing round is more than the cap, then the SAFE note converts at a valuation that was capped, meaning more equity to the investor.
- Discount Rate: Receives a discount on the price per share at the next financing round. If the valuation cap is not triggered, it converts at a discount to the price per share of the new round.
- Conversion Timing: Converts at the next priced equity round, using the same terms as the new investors’.
Benefits:
- Founder-Friendly: It does not require repayment either with interest or otherwise; hence, it will not impose any financial burden on the start-ups.
- Investor Protection: It provides upside potential through the valuation cap and discount rate.
2. Post-Money SAFE
The post-money SAFE, introduced later, calculates the ownership in equity to be received by the investor after all of the money from the new financing round has been added. This tends to give further clarity regarding its dilution impact on investors and founders alike.
Key Features:
- Clear Ownership Calculation: This gives the exact calculation of investor ownership after the money from the new round is included.
- Valuation Cap and Discount Rate: Similar to the Pre-Money SAFE, this investment vehicle includes a valuation cap and/or a discount rate that ensures protection for investor interests.
- Conversion Timing: Converts to equity at the next priced equity round.
Benefits:
- Investor Clarity: Much easier for investors to realize their stakes in equity and, therefore, a much easier assessment of the impactfulness of invested money.
- Lower Dilution Uncertainty: This helps founders and early investors understand how new financing rounds might further dilute their stakes.
3. Custom Variations of SAFE Notes
While Pre-Money and Post-Money SAFEs are standard forms, the entrepreneurs and investors may agree to customize their versions. These customizations may include:
Key Features:
- Multiple Valuation Caps: This variation includes various valuation caps based on different milestones or performance metrics.
- Hybrid SAFE-Convertible Notes: Recently, the features of SAFE Notes and Traditional Convertible Notes have been combined under the hybrid model. It includes a low interest rate or instead has a minimal maturity date.
- Milestone-Based Conversion: The conversion terms are based on achieving certain business milestones rather than on a new financing round.
Benefits:
- Tailored Terms: More flexibility is maintained to address unique circumstances or strategic goals as desired.
- Greater Protection: It involves the granting of extra layers of protection or rewards to investors based on certain performance indicators.
Which Is The Right Type of SAFE Note to Choose?
The types of SAFE notes to be used depend on the nature of the specific needs of the startup and the type of investors involved. Here are some considerations:
- Stage of the Startup: Early-stage startups may prefer the simpleness of the Pre-Money SAFE, while more established ones would like to go for the Post-Money SAFE for its clarity.
- Investor Preferences: Some investors may have a preference for the predictability of the Post-Money SAFE; others may be comfortable with the structure under a Pre-Money SAFE.
- Long-term goals: Custom variations can be designed to achieve strategic milestones or specific financing.
Conclusion
SAFE notes have changed early-stage financing by providing the domain of a flexible, simple, and founder-friendly investment instrument. The different types of SAFE notes, such as Pre-Money SAFE, Post-Money SAFE, and further custom variations, enable both startups and investors to select the appropriate tool based on their respective situations. Having taken deep consideration of the characteristics and benefits of each type, it is possible for startups to finance their growth and investors to protect their interests while maximizing their potential returns.

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