Stage 2: SAFE Round
A SAFE
(Simple Agreement for Future Equity) is the most common way early-stage startups raise their
first outside capital. Unlike a priced round, a SAFE does not immediately create new shares or set a
share price. Instead, the investor’s money converts later
when you do your first priced round.
The standard template is the
YC SAFE,
a short, founder-friendly document used by thousands of startups.
Most SAFEs today are post-money SAFEs —
the valuation cap includes the SAFE money itself. This means if you raise $1M on a $10M cap,
investors will own exactly 10%. This is simpler and more predictable than the older pre-money SAFEs,
where your dilution depended on how much total capital was raised across all SAFEs.
In practice, startups almost always have multiple SAFE investors in this round —
angel investors, small funds, and accelerators each write their own SAFE note.
Some VCs have ownership targets,
meaning they want to own a certain minimum percentage to make the investment worthwhile.
As you raise more, more investors tend to join the round.
The two key terms are the valuation cap
and the discount rate.
The investor gets whichever gives them more shares.
(Note: most post-money SAFEs use only a cap with no discount — try setting the discount to 0% for the modern standard.)
The Valuation Cap Trap
A higher cap feels like validation — but it’s really a promise to deliver growth
before your next priced round. Setting the cap too high creates serious risks:
- Down round risk: If your Series A valuation comes in below the cap,
it signals the company hasn’t grown as expected. This triggers difficult investor conversations,
depresses your negotiating position, and can scare off new investors entirely. - Compounding dilution: With post-money SAFEs, each SAFE investor’s ownership is
fixed by the cap — but earlier SAFE holders aren’t diluted by later ones. All the dilution from
stacking multiple SAFEs falls on the founders. - Investor misalignment: SAFE holders may pressure you to close your next round
once a valuation hits their cap (locking in their deal), even if waiting could yield a better outcome for the company. - Hiring difficulty: A high cap inflates the 409A valuation for employee options,
meaning early employees get a worse deal with higher strike prices — making equity compensation less attractive.
Rule of thumb: set the cap at a valuation you’re confident the company can exceed within 18 months.
