Startup Investor School Day 1

Levy describes the SAFE as a short agreement for early-stage companies raising money before a priced round. It is not a loan: it accrues no interest and has no repayment date. Investors and founders generally negotiate the investment amount and a valuation cap; other versions use a discount or an MFN clause.

Nathoo explains that the cap sets the highest valuation used to calculate a SAFE’s conversion price, rather than stating the company’s current value. In her example, $800,000 invested at an $8 million cap converts into just over 1 million shares; a later $4 million round at a $16 million pre-money valuation dilutes the SAFE investor to just over 7% ownership. She recommends modeling different round scenarios because ownership depends on the options pool and new investment.

Nathoo explains that in a high-value acquisition or IPO, SAFE holders convert into common shares and share in proceeds; in an acquihire, they can choose between conversion and repayment. If the company dissolves, SAFE holders are paid after creditors and employee salaries, if funds remain. The SAFE does not address a company that remains profitable without raising or being acquired, so Levy advises against using it for lifestyle businesses.

Nathoo recommends confirming the investment amount and cap by email before signing, then checking the SAFE’s terms and investor name carefully. Investors should be ready to wire funds promptly after signing. At conversion, they should review the pro forma cap table and conversion calculations, and make sure contractual rights such as pro rata are honored.

Levy advises investors to focus on the possibility of large returns, help founders in ways they ask for, and accept that companies may fail or pivot. Nathoo emphasizes that a SAFE is not debt and investors cannot demand repayment just because a company changes direction. Both recommend patience and working with founders to understand dilution and conversion.