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Announcing the SAFE, a Replacement for Convertible Notes

The safe (Simple Agreement for Future Equity) is intended to replace convertible notes in most cases, and  addresses many of the problems with convertible notes while preserving their flexibility.

YC partner (and lawyer) Carolynn Levy has created a new alternative to convertible notes, called a safe, that has the advantages of convertible debt without some of the disadvantages.

The advantage of raising convertible debt is that it makes fundraising quicker.  You don’t have to negotiate all the details you’d have to if you sold stock to an investor.  Instead you give them the right to buy stock in your equity round when it does happen, on whatever the terms turn out to be.

The disadvantage of convertible debt is that although it’s only nominally debt, the law cares what things are nominally, and there are all sorts of regulations about debt.  There has to be a term, which in California can’t be too long, and there has to be an interest rate not too far from market rates.   The interest on convertible notes makes conversion complicated, and the fact that the debt has a fixed term causes extra work for both parties when it has to be extended.A safe is like a convertible note in that the investor buys not stock itself but the right to buy stock in an equity round when it occurs.  A safe can have a valuation cap, or be uncapped, just like a note.  But what the investor buys is not debt, but something more like a warrant.  So there is no need to fix a term or decide on an interest rate.Safes should work just like convertible notes, but with fewer complications.

Features of a safe:
  • Unlike a convertible note, a safe is not a debt instrument. Debt instruments have maturity dates, are typically subject to certain regulations, create the threat of insolvency, and can include security interests and sometimes subordination agreements, all of which can have unintended negative consequences for startups.
  • Because the money invested in a startup via a safe is not a loan, it will not accrue interest. This is particularly beneficial for startups, but also better embodies the intention of investors, who never meant to be lenders in the first place.
  • As a flexible, one-document security without numerous terms to negotiate, a safe should save startups and investors money in legal fees and reduce the time spent negotiating the terms of the investment. Startups and investors will usually only have to negotiate one item: the valuation cap. 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.
  • A safe still allows for high resolution fundraising. Startups can close with investors as soon as both parties are ready, instead of trying to coordinate a single close with all investors simultaneously.

Download documents here and see features of safe note. 4 versions.




Read the full article here on Y Combinator.

About the Author


Paul Graham

Paul Graham is a programmer, writer, and investor. In 1995, he and Robert Morris started Viaweb, the first software as a service company. Viaweb was acquired by Yahoo in 1998, where it became Yahoo Store. In 2001 he started publishing essays on, which in 2011 got 17 million page views. In 2005 he and Jessica Livingston, Robert Morris, and Trevor Blackwell started Y Combinator, the first of a new type of startup incubator. Since 2005 Y Combinator has funded over 450 startups, including Dropbox, Airbnb, Stripe, and Reddit.