SAFEs and Convertible Notes FAQ
Last verified Oct 7, 2026 · Reviewed by Value8 valuation team
What is a SAFE?
A SAFE (Simple Agreement for Future Equity) is an agreement under which an investor gives a company money now in exchange for the right to receive shares later, usually when the company closes a future priced equity round. A SAFE is not a loan: it carries no interest rate, no maturity date, and no repayment obligation.
SAFE vs convertible note: what's the difference?
A SAFE is not debt; a convertible note is. A note accrues interest from the date it's issued and has a stated maturity date by which it must convert, be repaid, or be extended. A SAFE has neither. Both instruments otherwise use the same general cap/discount mechanics to convert into equity at a future priced round.
Post-money vs pre-money SAFE: what's the difference?
A pre-money SAFE's valuation cap is measured against the company's capitalization before the new round and before other SAFEs convert, so each pre-money SAFE sizes independently and doesn't dilute other converting SAFEs. A post-money SAFE's cap is measured against the capitalization including all SAFE shares converting in that same round, which fixes the investor's exact post-money ownership percentage up front but requires solving every post-money SAFE in the batch simultaneously, since each one's converted shares affect every other one's conversion price.
What is a valuation cap?
A valuation cap is a ceiling on the company valuation used to calculate how many shares a SAFE or note converts into, regardless of what valuation the actual priced round ends up using. A lower cap is better for the investor: at a given investment amount, a lower cap means a lower conversion price and more shares.
How does a discount work?
A discount is a percentage reduction off the price per share that new investors pay in the priced round. A 20% discount means the SAFE or note converts at 80% of the round's per-share price. When an instrument has both a cap and a discount, it converts at whichever of the two produces the lower price per share for the holder (more shares), not both applied together.
What is an MFN clause?
MFN stands for "most favored nation." It's a clause, generally used on SAFEs, under which an earlier SAFE's terms automatically upgrade to match a later SAFE's terms if the later SAFE is more favorable (a lower cap or a higher discount), as long as the later SAFE was issued after it and before the clause terminates. It protects an early or lightly-termed SAFE investor from being undercut by a better deal given to a later investor.
How do SAFEs convert at a priced round?
At a priced round, any MFN clauses resolve first (adopting the most favorable terms among later SAFEs), then the round's own per-share price is set from the new investors' pre-money valuation divided by the company's pre-round fully diluted share count. Each SAFE then converts at whichever is lower: its capped price or its discounted price. Post-money SAFEs and the round's option-pool increase are solved together with the new round, since each depends on the resulting total share count, which in turn depends on them; a well-specified round converges to one stable share price rather than being solved instrument by instrument.
How does a convertible note convert?
The same as a SAFE (better of capped price or discounted price against the round's share price), except the balance that converts is the note's principal plus any interest it has accrued (simple, non-compounding interest, generally on an actual-days/365 basis) from issuance to the conversion date, rather than principal alone.
Do SAFEs and notes dilute founders?
Yes. Every share a converting SAFE or note receives becomes part of the company's fully diluted share count, alongside the new round's preferred shares and any increase to the option pool. Existing holders, including founders, don't lose shares, but their percentage ownership decreases because the total share count they're a percentage of has grown. A lower valuation cap means more shares go to the early investor and less of the company is left for everyone else once the round closes, so cap and discount terms have a real, calculable dilution impact that's set well before the next priced round is signed.
What happens to a SAFE or note if there's never a priced round?
Both instrument types typically include separate conversion or payout terms for an acquisition, dissolution, or other liquidity event that happens before any priced round, as spelled out in the specific agreement (commonly a cash-out option, often with the cap or discount still applying). A convertible note additionally has its stated maturity date: if the company hasn't raised a qualifying round by then, the note comes due and the holder can seek repayment or renegotiate, a risk a SAFE simply doesn't carry.
Can a company have multiple SAFEs and notes outstanding with different terms?
Yes, this is common: companies frequently raise several smaller amounts across multiple SAFEs and/or notes, each with its own cap, discount, and (for SAFEs) MFN status, before their first priced round. All of them convert together when that round closes, which is exactly why MFN clauses and round-wide conversion modeling (rather than converting one instrument at a time in isolation) matter for getting the resulting cap table right.
Is a SAFE the same as equity?
Not until it converts. A SAFE is a contractual right to receive equity in the future; it isn't a share, has no voting rights, and doesn't appear on the cap table as outstanding stock until the conversion event (a priced round, an acquisition, or another triggering event defined in the agreement) actually occurs.
How does Value8 model SAFE and note conversion?
Value8's Cap Table app tracks SAFEs and convertible notes as their own instrument type, with their cap, discount, MFN status, interest rate, and maturity date recorded against the company's live cap table data, and its Equity Planner tool models exactly how they convert (cap/discount better-of, MFN resolution, post-money iterative solve, resulting dilution) for a hypothetical future round before it closes. See how Value8 does SAFEs and convertible notes for the full mechanics.
This is general information about SAFE and convertible note market practice, not legal or financial advice. Confirm specific instrument terms with qualified legal counsel.