Safes & Others

The most popular replacement for convertible notes are safes (short for simple agreement for future equity), created by Y Combinator. Like convertible notes, safes can convert into preferred stock.


There are three major types of safes - safes with a valuation cap, safes with a discount, and safes with both. These correspond to the three major flavors of convertible notes.

Valuation Cap

When a safe converts into preferred stock, the conversion price is used to determine how many shares the safe converts into. The conversion price is typically calculated in the same way the price per share of the preferred stock is, by default. That is, by dividing the pre-money valuation by the fully-diluted capitalization.


If the investment amount is $1 million, and the price per share of the preferred stock is $1.00, the safe would convert into 1 million shares by default.

Valuation caps are a limit on the pre-money valuation used to determine the conversion price. By limiting the pre-money valuation, valuation caps ensure that safes will convert into a minimum percentage of the company, as calculated prior to the preferred stock financing. There is no floor on the percentage of the company that the safeholder ultimately ends up with however, since that depends on the amount invested by others in the preferred stock financing.


If someone invests $1 million through a safe with a $10 million valuation cap, the safe will never convert into a number of shares that represent less than 10% of the company prior to the preferred stock financing. If the company sold preferred stock at a $20 million pre-money valuation, the safe would convert into $2 million worth of shares.

Valuation caps are also referred to as conversion caps or target valuations.


The conversion price can also be set to have a fixed discount from the price per share of the preferred stock. This ensures that the safeholders will get a better deal than subsequent preferred stock purchasers.


If someone invests $1 million through a safe with a 10% discount, the safe will always convert into shares that are worth 90% of what someone would have to pay for the same number of shares in the preferred stock financing.

Valuation Cap & Discount

Some safes have both a valuation cap and a discount. When safes with both a valuation cap and discount convert, the more investor-favorable method is used - i.e. the method that results in the safe converting into more shares.


By default, if a safe has not already converted by the time the company is acquired, the investor has the choice of (1) receiving their investment back1 or (2) having the safe convert into common stock using the same valuation cap or discount as for a preferred stock conversion.

When investors have significant negotiating power, they may negotiate to have the safe specify an option to receive a multiple of their investment back (typically 2x). This has the effect of increasing the minimum acquisition price at which founders and employees will receive proceeds from an acquisition.


Other notable convertible equity forms include the KISS (created by 500 Startups).

If the proceeds from the acquisition are insufficient to return the investment back for all safes, the proceeds are typically distributed pro-rata to the investors. This means that investors will receive proceeds in relative proportion to the size of their investment.

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