Chapter 6: Raising Capital
Now, let’s talk about a more startup-friendly option: the SAFE (Simple Agreement for Future Equity). SAFEs were created by Y Combinator to make early-stage investing simpler and faster. Unlike a priced round, a SAFE does not set a valuation immediately. Instead, investors give money now in exchange for the right to receive equity later, usually at the next priced round.
Here’s how a SAFE works:
An investor provides funding, but instead of receiving shares immediately, they get the right to convert their investment into equity when the company raises a future priced round.
SAFEs often include a valuation cap (the maximum price at which the investment will convert into equity) or a discount rate (giving investors a better price than future investors).
There’s no interest rate or maturity date, making SAFEs different from debt.
For example, if an investor puts in $100,000 with a SAFE that has a valuation cap of $5 million, and the company later raises a priced round at a $10 million valuation, the SAFE investor gets equity at the lower $5 million valuation—essentially doubling their buying power.
Pros:
Fast and simple—no need to negotiate valuation upfront.
Lower legal costs compared to priced rounds.
More attractive to early-stage investors because of the valuation cap.
Cons:
Dilution uncertainty—founders don’t know exactly how much equity they’re giving away until the SAFE converts.
Can become complicated if too many SAFEs are issued with different terms.
Investors have no control or voting rights until the SAFE converts.
SAFEs are great for early-stage startups that want to raise funds quickly without the hassle of a formal valuation process. However, they should be used strategically to avoid excessive dilution when they eventually convert into equity.