What is a SAFE note? Understanding the essential funding instrument for startups

What is a SAFE note? (Simple agreement for future equity)

A SAFE note is a financial instrument that allows startups to raise capital from investors without immediately setting a company's valuation or issuing equity. Standing for Simple Agreement for Future Equity, this contract gives investors the right to receive preferred stock in a future priced round, typically during a Series A or subsequent equity financing round.

Why Y Combinator created SAFEs

Y Combinator introduced the SAFE in late 2013 to solve a critical problem: founders of pre-revenue companies were struggling with the complexity and cost of traditional fundraising instruments. Convertible notes, the dominant early-stage instrument at the time, came with complications like interest rates, maturity dates, and repayment obligations that created unnecessary pressure on founders.

The SAFE was designed as a "simple and fast way" to get early capital into companies, treating SAFE holders as early investors in a future priced round rather than creditors. Since its introduction, the SAFE has been used by almost all YC startups and countless non-YC companies, becoming the dominant instrument for early stage fundraising globally.

In 2018, Y Combinator released the "post-money" SAFE, which provides immediate clarity on ownership percentages, a critical improvement that helps both founders and investors understand exact dilution from day one.

Key characteristics of SAFE notes

Understanding what makes SAFE notes unique helps founders and investors navigate early-stage fundraising more effectively:

• No debt, no immediate equity: SAFEs aren't loans or direct stock purchases. They're contractual rights to future shares.
  
• No interest payments: Unlike convertible notes, SAFEs don't accumulate interest over time.
  
• No maturity date: There's no deadline forcing you to raise a priced round or repay investors.
  
• Deferred valuation: You raise capital without setting a specific valuation, ideal when you're too early for accurate pricing.
  
• Conversion triggers: SAFEs automatically convert into equity during a priced financing round, acquisition, or dissolution.
  
• Investor protection: Valuation caps or discount rates (15–25%) ensure early investors get better terms than later ones. However, SAFE holders typically don't receive voting rights, board seats, or other governance rights until the SAFE converts into equity. In some cases, additional rights such as pro-rata participation may be granted through side letters, but these aren't standard and depend on individual agreements.
  
• Fast execution: Close with each investor individually as soon as they're ready, rather than coordinating a single close with everyone.
  

How to understand SAFE notes

A SAFE is essentially a promise: investors provide funding now, and in exchange, they'll receive preferred stock later when your company raises a traditional funding round. It's like a warrant to purchase stock in a future priced round, but without the complexity of debt instruments or the immediate dilution of equity sales.

For small businesses and startups operating in Singapore and across Southeast Asia, SAFE notes have become increasingly popular for early-stage fundraising because they allow founders to raise capital efficiently, often closing in days rather than weeks or months, while focusing on building their product and acquiring customers.

Dominance in early-stage investing

Recent data shows just how dominant SAFEs have become in early-stage fundraising. For the earliest pre-seed rounds, SAFEs comprised a record high of 90% of all deals on Carta in the first quarter of 2025. Even at the seed stage, SAFEs accounted for 64% of all seed rounds, compared to just 27% for priced equity and 10% for convertible notes.

Why SAFEs became the standard early-stage funding tool

Understanding the history behind SAFE notes helps explain why they've become so popular. Before SAFE notes existed, startups typically relied on convertible notes, a form of short-term debt that converts to equity. While functional, convertible notes came with complications: interest rates that accumulated over time, maturity dates that created pressure on founders, and more complex negotiations around terms.

Y Combinator introduced the SAFE note to eliminate these friction points. The result? A cleaner, founder-friendly instrument that accelerated early-stage fundraising while maintaining fairness for early investors.

Today, SAFE notes dominate seed-stage investing because they:

• Remove valuation debates during the earliest, most uncertain phase of growth.
  
• Eliminate interest payments and debt obligations that strain cash flow.
  
• Reduce legal costs compared to priced rounds.
  
• Allow startups to close funding quickly, often within days instead of weeks.
  
• Provide flexibility for both solopreneurs and institutional investors.
  

How SAFE notes work

Now that you understand what SAFE notes are and why they matter, let's break down the mechanics of how they actually function in practice.

Investment occurs now, equity comes later

When an investor commits capital through a SAFE, they're purchasing the right to receive equity at a later date; they don't receive actual shares at the time of investment. This distinction matters because it means your cap table remains clean until conversion, and you avoid immediate dilution.

SAFE converts only when a 'trigger event' happens

SAFE note holders don't receive shares immediately. Instead, their SAFE converts to equity when specific events occur:

• Equity financing round: The most common trigger is when your startup raises a future-priced round (typically Series A or later).
  
• Liquidity event: If the company is acquired or goes public before raising a priced round.
  
• Dissolution: In the rare case of a company shutdown, SAFE holders have limited rights to remaining assets.
  

No repayment obligation

Unlike convertible notes or traditional loans, SAFE notes carry zero repayment requirement. If your startup never raises a priced round and doesn't achieve a liquidity event, SAFE investors don't get their money back. This high-risk, high-reward structure aligns investor interests with long-term company success.

Conversion math overview

When conversion happens, the number of shares a SAFE holder receives depends on the valuation cap and discount rate (if applicable). The formula ensures early investors receive better terms than future investors who join at the priced round.

Example: If you raise SGD $500,000 on a SAFE with a valuation cap of SGD $5 million, and later raise a Series A at a SGD $10 million valuation, the SAFE converts at the lower SGD $5 million valuation cap, effectively giving early backers a 50% discount.

What if investors ask for additional rights?

Standard SAFE agreements don't include anti-dilution protection, pro-rata rights, or other ongoing investor rights before conversion. However, in practice, some investors may request additional terms through side letters.

For example, a side letter may grant an investor the right to participate in future funding rounds to maintain their ownership percentage (pro-rata rights). These arrangements don't change the SAFE itself but can affect future cap table outcomes and dilution calculations.

Because these terms sit outside the core SAFE document, founders should assess them carefully and seek legal advice before agreeing to any side letters, especially when raising from multiple investors.

Types of SAFE notes

Not all SAFE notes are created equal. There are several variants, each with different implications for founders and investors. Let's explore the main types you'll encounter.

Structural Basis

Post-money SAFE

The post-money SAFE (introduced in 2018) is now the industry standard. It calculates dilution after including the SAFE itself in the cap table, providing founders with precise visibility into ownership percentages post-conversion.

Key advantage: Founders know exactly how much dilution they'll experience when the SAFE converts.

Pre-money SAFE

The original SAFE structure calculates valuation before adding the SAFE to the cap table. This creates uncertainty around final dilution, which is why most investors and founders now prefer post-money SAFE agreements.

Economic Variants

SAFE with a valuation cap (no discount)

This SAFE note sets a maximum valuation at which it converts, protecting early investors if your company's valuation skyrockets. If the priced round values your company higher than the cap, the SAFE converts at the cap, giving early backers more shares.

Best for: Startups with clear growth trajectories where investors want downside protection.

SAFE with discount (no valuation cap)

This version offers investors a percentage discount (typically 15-25%) off the priced round valuation, rewarding them for early risk without setting a hard valuation ceiling.

Best for: Very early-stage startups where setting a valuation cap feels premature.

SAFE with valuation cap and discount

This version gives investors two benefits. When the SAFE converts, it uses whichever is more favourable to the investor:

• the lower price from the valuation cap, or
  
• the lower price from the discount on the next funding round.
  

This means early investors are well protected if the company’s valuation increases quickly.

Best for: Early-stage startups with strong growth potential, where investors want maximum protection while founders are comfortable managing and modelling potential dilution.

SAFE with MFN (no discount, no valuation cap)

The Most Favoured Nation (MFN) clause gives investors the best terms of any future investors or multiple SAFE notes issued later. This structure is rare and typically used only in unique circumstances.

Key SAFE terms founders must understand

When negotiating SAFE notes, you'll encounter several critical terms that directly impact your ownership and control. Here's what each term means and why it matters:

[Table:1]

Pros and cons of using SAFE notes

Every funding instrument comes with trade-offs. Here's an honest assessment of what SAFE notes offer and where they fall short:

Benefits of using SAFE notes

• Speed: Close funding in days, not months; critical when you need capital to seize market opportunities
  
• Simplicity: Minimal legal paperwork means lower costs for small businesses and startups
  
• Flexibility: No maturity date or interest payments means no pressure to raise a priced round prematurely
  
• Founder-friendly: Defer valuation discussions until you have more traction and leverage
  

Drawbacks of using SAFE notes

• Dilution uncertainty: Until conversion, founders can't precisely predict final ownership (especially with pre-money SAFEs)
  
• Economic upside without control protections: SAFEs don't provide traditional control or governance protections before conversion. However, valuation caps and discount rates improve conversion economics for early investors, and some investors may negotiate additional rights, such as pro-rata participation, depending on the terms.
  
• Dilution depends on the SAFE structure: Issuing multiple SAFEs can create complex dilution outcomes at conversion, particularly when a mix of pre-money and post-money SAFEs is used. The final ownership impact depends on each SAFE’s structure, valuation cap, and conversion mechanics, making dilution modelling essential before raising a priced round.
  
• Not true equity: Investors don't get voting rights or board seats until conversion occurs
  

SAFE vs Convertible note vs Priced round

Choosing between different funding instruments can feel overwhelming. This comparison table helps startups, small businesses, and SMEs understand when each option makes the most sense:

[Table:2]

When to use each

Choose a SAFE when:

• You're raising pre-seed or seed capital (typically under SGD $1-2 million).
  
• You want to avoid setting a valuation until you have more traction.
  
• Speed matters; you need to close funding in days, not weeks.
  
• You want to minimise legal costs and complexity.
  
• Your investors are comfortable with standard Y Combinator terms.
  

Choose a convertible note when:

• You're raising a bridge round between equity rounds.
  
• Investors want some downside protection through debt structure.
  
• You need slightly more investor-friendly terms than a SAFE offers.
  
• Your company has a clear timeline to Series A (within 12–24 months).
  
• You're in a jurisdiction where SAFEs are less common or understood.
  

Choose a priced round when:

• You're raising Series A or later (typically SGD $2 million+).
  
• Your company has clear metrics, traction, and defensible valuation.
  
• Investors want immediate equity rights and board representation.
  
• You're ready for institutional investors (VCs, corporate investors).
  
• You need to establish formal governance structures and investor protections.
  

SAFE notes in Singapore: Legal and practical considerations

For startups and SMEs operating in Singapore, understanding the local regulatory landscape is crucial.

In Singapore, SAFEs are commonly used in private fundraising, but their legal, regulatory, and tax treatment can vary depending on investor type, offering structure, and contract terms. Regulatory requirements under MAS rules, as well as tax and accounting outcomes, may differ from those in other jurisdictions. Founders should seek advice from legal and tax professionals familiar with Singapore’s startup ecosystem.

That said, you should also understand these local nuances:

• Legal classification: SAFEs are treated as contingent equity instruments, not debt.
  
• MAS guidelines: While not regulated as securities offerings for qualified investors, public offerings require prospectus filing.
  
• Tax implications: SAFE conversions typically don't trigger immediate tax events for founders.
  
• Accounting treatment: Classification varies; you’ll need to work with accountants to determine appropriate treatment under SFRS.
  

Professional services providers and legal advisors familiar with Singapore's startup ecosystem can help SMEs structure SAFE terms appropriately.

How to issue a SAFE step-by-step for founders

Ready to raise capital through a SAFE note? Follow this practical roadmap to execute your fundraise efficiently:

• Determine funding needs: Calculate how much capital your startup requires for the next 12–18 months.
  
• Set SAFE terms: Decide on valuation cap, discount rate, and other key terms with advisor input.
  
• Use standard templates: Download Y Combinator's official SAFE documents or work with legal counsel.
  
• Negotiate with investors: Discuss terms with early investors and institutional investors.
  
• Execute agreements: Sign documents and receive funds, typically via wire transfer to your business account.
  
• Track SAFE holders: Maintain accurate records of all SAFE note holders and terms for future conversion.
  
• Plan for conversion: Project dilution scenarios before raising your priced round.
  

Examples: How SAFE conversion happens

Theory is helpful, but concrete examples show exactly how SAFE notes convert in real-world scenarios. Let's walk through two common situations:

Scenario 1: Seed round with valuation cap

Your startup raises SGD $300,000 via SAFE with a valuation cap of SGD $3 million. Twelve months later, you raise Series A at a SGD $10 million pre-money valuation.

Conversion calculation:

• SAFE converts at SGD $3 million cap (not SGD $10 million)
  
• SAFE holders receive: (SGD $300,000 / SGD $3 million) = 10% ownership
  
• Despite Series A valuing company much higher, early investors benefit from a lower cap
  

Scenario 2: Multiple SAFEs with different terms

You raise three separate SAFE rounds:

• Round 1: SGD $200,000 at SGD $4 million cap
  
• Round 2: SGD $300,000 at SGD $6 million cap
  
• Round 3: SGD $500,000 at SGD $8 million cap
  

At Series A (SGD $12 million pre-money), each SAFE converts at its respective cap, with Round 1 investors receiving the best conversion terms.

How SAFE notes affect your financial statements

Understanding the accounting implications of SAFE notes helps startups and SMEs maintain clean books and prepare for investor due diligence. Here's what you need to know:

Classification under SFRS/IFRS

SAFE notes are typically classified as equity instruments rather than liabilities on the balance sheet, since they don't require repayment and convert only upon specific equity events.

While SAFEs are often treated more like equity than debt because they have no repayment obligation, their accounting classification under SFRS/IFRS depends on the specific contract terms. Certain features, such as redemption rights or cash-settlement provisions, may require a SAFE to be classified as a liability. Therefore, you should work with qualified accountants to determine the correct treatment.

Impact on the balance sheet

When you receive SAFE funding, your financial statements change in these specific ways:

• Assets: Cash increases when SAFE funds are received.
  
• Liabilities: No debt recorded (unlike convertible notes).
  
• Equity: SAFE appears as a separate equity line item until conversion.
  

Impact on VC due diligence

During the priced round due diligence, VCs scrutinise your cap table, including all SAFE note holders. Clean documentation and clear terms make the process smoother and faster.

Common mistakes founders make with SAFEs

Learning from others' mistakes can save your startup significant headaches. Here are the pitfalls to avoid when using SAFE notes:

• Issuing too many SAFEs: Raising multiple rounds of SAFE notes without considering cumulative dilution can surprise founders at conversion
  
• Ignoring valuation caps: Setting caps too low creates excessive dilution; too high discourages investors
  
• Poor record-keeping: Losing track of SAFE note holders and terms creates nightmares during priced rounds
  
• Not modelling conversion scenarios: Failing to project different conversion outcomes leaves founders unprepared for dilution
  
• Mixing SAFE variants: Using both pre-money and post-money SAFEs simultaneously creates confusion
  

Best practices for managing SAFE-based fundraising

Successful startup founders follow these proven strategies when raising capital through SAFE notes:

• Model dilution scenarios: Use cap table software to project outcomes across various valuations
  
• Standardise terms: Keep valuation caps and discounts consistent within funding rounds
  
• Communicate clearly: Keep SAFE note holders updated on company progress and future fundraising plans
  
• Plan conversion timing: Raise priced rounds when you have strong metrics and leverage
  
• Maintain clean records: Document all SAFE agreements and track key terms systematically
  
• Consult professionals: Work with experienced lawyers and financial advisors familiar with Singapore's ecosystem
  

How Aspire helps startups manage SAFE funds and financial operations

Once you've raised capital through SAFE notes, managing those funds efficiently becomes critical for startups, solopreneurs, and SMEs. At Aspire, we provide the financial infrastructure needed to deploy capital effectively across borders.

With Aspire, you can:

• Track spending in real time across teams, countries, and currencies.
  
• Send international payments in 30+ currencies with transparent FX rates.
  
• Issue corporate cards with built-in spend controls for your growing team.
  
• Automate reconciliation to maintain clean books for investor reporting.
  
• Access flexible credit that scales as your startup grows.
  

From seed stage to Series B and beyond, Aspire removes financial friction so you can focus on building, not bookkeeping.

Open your Aspire account in minutes and start managing your startup finances like a global company from day one.

Summary

SAFE notes have transformed early-stage fundraising by offering startups a fast, flexible way to raise capital without the complexity of priced rounds or the constraints of convertible notes. For small and medium-sized entities operating in Singapore and beyond, understanding how SAFEs work, from conversion mechanics to dilution implications, is essential for making informed funding decisions.

While SAFE notes offer significant advantages in speed and simplicity, founders must carefully consider terms like valuation caps and discount rates, track multiple SAFE notes diligently, and plan for eventual conversion during a future priced round. With proper structure and management, SAFE notes can be the ideal instrument to fuel your company’s next phase of growth.

Frequently asked questions

What is a SAFE note example?

A SAFE note example: Your startup raises SGD $250,000 from an early investor using a SAFE with a SGD $5 million valuation cap. Later, when you raise Series A at a SGD $15 million valuation, the SAFE converts at the SGD $5 million cap, giving the investor (SGD $250,000 / SGD $5 million) = 5% ownership instead of the 1.67% they would receive at the Series A valuation.

What is the difference between a SAFE note and a KISS note?

While both are simple agreements for future equity, KISS (Keep It Simple Security) notes include optional debt-like features such as interest rates and maturity dates. SAFE notes are purely equity instruments with no debt characteristics, making them simpler and more founder-friendly for most early-stage startups.

When should I use a SAFE note?

Use a SAFE note when you're raising early-stage fundraising capital (typically pre-seed or seed), want to avoid setting a valuation prematurely, need to close funding quickly, or want to minimise legal costs. SAFEs work best for startups with clear growth potential where investors trust future priced rounds will occur.

Is a SAFE note a loan?

No, a SAFE note isn't a loan. Unlike convertible notes or traditional debt, SAFEs have no repayment obligation, no interest payments, and no maturity date. They're pure equity instruments that convert to preferred stock during future priced rounds or liquidity events.

What happens if a SAFE note never converts?

If your startup never raises a priced round and doesn't achieve a liquidity event (acquisition or IPO), SAFE note holders typically receive nothing. In a dissolution scenario, SAFE holders may have limited rights to remaining assets, but they rank below debt holders and preferred stock holders in the liquidation preference.

What is the difference between a SAFE note and a promissory note?

A promissory note is a debt instrument requiring repayment with interest, essentially a formal IOU. A SAFE note is an equity instrument with no repayment requirement that converts to shares during future equity events. Promissory notes create debt obligations; SAFEs create future equity rights.