You've probably heard the term "SAFE" thrown around in investor circles lately. And no, we're not talking about keeping your money under a mattress. SAFE agreements have become the go-to investment structure for angel investors, and for good reason.

But here's the thing: if you're new to angel investing, SAFEs can feel like alphabet soup. What exactly is a Simple Agreement for Future Equity? How does it differ from convertible notes? And why are experienced angels choosing SAFEs over traditional equity investments?

Let's break it all down. By the end of this post, you'll understand why SAFEs have become such a popular tool for early-stage investing and whether they're right for your investment strategy. Ready to join thousands of other investors who are already using Angel Squad to access top-tier startup deals?

The SAFE Basics: What You Need to Know

Think of a SAFE as an IOU with a twist. When you invest using a SAFE agreement, you're giving money to a startup now in exchange for equity later. The SAFE investor receives the future shares when a priced round of investment or liquidity event occurs. SAFEs are intended to provide a simpler mechanism for startups to seek initial funding other than convertible notes.

Unlike buying shares directly, shares are not valued at the time the SAFE is signed. Instead, investors and the company negotiate the mechanism by which future shares will be issued, and defer actual valuation.

Y Combinator introduced the original SAFE in 2013, and it quickly escaped from the startup accelerator world to become mainstream. As Carta indicates, the SAFE has become the "default" for earliest stage deals for good reason.

SAFE vs. Convertible Notes: The Key Differences

This is where things get interesting. Both SAFEs and convertible notes help you invest in startups before they have a formal valuation, but they work very differently.

Convertible notes are debt instruments. You're essentially loaning money to the company, which means:

• Interest accumulates over time
• There's a maturity date
• More complex legal documentation

SAFEs are not debt. Unlike a convertible note, a SAFE is not a loan; it is more like a warrant. In particular, there is no interest paid and no maturity date, and therefore SAFEs are not subject to the regulations that debt may be in many jurisdictions.

The simplicity is the main draw. "Safes should work just like convertible notes, but with fewer complications," according to startup accelerator Y Combinator.

Post-Money vs. Pre-Money SAFEs: The Game Changer

Here's where many investors get confused, but it's crucial to understand the difference.

Pre-Money SAFEs: The original version where investors and the company have to wait and see how their ownership percentage compares with the other investors in a future round. This creates uncertainty for everyone involved.

Post-Money SAFEs: A post-money SAFE sets a fixed ownership percentage for the investor, which Y Combinator introduced in 2018 to solve problems with the original version.

With a post-money SAFE, the investor can basically pre-determine what her ownership stake in the company will be at the beginning of the next funding round. This gives both founders and investors much more clarity upfront.

Investors: The pre-money SAFE sucked. It's gone. The new post-money SAFE is better than convertible notes. That's a strong statement, but many experienced angels agree.

Valuation Caps and Discount Rates: Your Upside Protection

SAFEs typically include two key investor protections:

Valuation Cap: This sets the maximum valuation at which your SAFE will convert to equity. If a startup raises their Series A at a $10 million valuation, but your SAFE has a $5 million cap, you convert at the lower $5 million valuation – meaning you get more shares for your money.

Discount Rate: This gives you a percentage discount compared to new investors in the priced round. As a rule of thumb, I expect discount factors to be in the 10% to 25% range, depending on level for risk and anticipated timing of the conversion event.

These mechanisms reward you for investing early and taking on more risk than later-stage investors.

Why Angels Love SAFEs

The appeal is pretty straightforward:

• Speed and Simplicity: As a flexible, one-document security without numerous terms to negotiate, safes save startups and investors money in legal fees and reduce the time spent negotiating the terms of the investment.
• High-Resolution Fundraising: Startups can close with an investor as soon as both parties are ready to sign and the investor is ready to wire money, instead of trying to coordinate multiple investors.
• No Maturity Hassles: Because a safe has no expiration or maturity date, there should be no time or money spent dealing with extending maturity dates, revising interest rates or the like.

If you’re excited to explore SAFEs through real-world deals, Angel Squad gives you front-row access.

The Potential Downsides to Consider

SAFEs aren't perfect. However, as use has become more prevalent, concerns have emerged related to unexpected dilution (and voting control) issues for entrepreneurs, especially where multiple SAFE investment rounds are done prior to a priced equity round.

For investors, the main risks include:

• No guarantee the triggering event will occur
• Potential for significant dilution if multiple SAFE rounds happen
• SAFEs are also dangerous for non-accredited crowdfunding investors who might be directed towards SAFEs in small businesses that realistically will never obtain priced equity financing

Making SAFEs Work for Your Investment Strategy

By the time companies need to raise a true Seed stage angel round, they often have to deal with more complex investor, employee, partner, customer, competitor and IP matters. Experienced angels know that these issues call for more sophisticated deal terms.

SAFEs work best for very early-stage investments where:

• The company is pre-revenue or just getting started
• You want to move quickly without extensive due diligence
• The startup plans to raise a larger priced round within 12–18 months

SAFEs can be used in later rounds even though they are intended for use in angel and seed capital fundraising. However, there are caveats – later-stage investors often prefer more traditional equity structures with governance rights.

The Bottom Line for Angel Investors

SAFEs have become popular because they solve real problems in early-stage investing. They're faster, simpler, and cheaper than convertible notes or equity rounds. The post-money SAFE, in particular, provides the clarity that both founders and investors need.

But like any investment structure, SAFEs aren't right for every situation. You'll want to consider the stage of the company, your relationship with the founders, and your own investment timeline.

Want to see how experienced investors are using SAFEs in real deals? Join Angel Squad to access curated investment opportunities and learn from a community of active angel investors who can share their experiences with different investment structures.