Early-stage capital usually comes in one of two shapes: a SAFE (a simple agreement for future equity), or a priced equity round. They get to the same place — the investor ends up owning shares — but they differ in speed, cost, and when the valuation question gets answered.
What a SAFE is
A SAFE is not a loan and not yet shares. The investor pays now for the right to receive shares when the company next does a priced equity financing. There is no interest and no maturity date — the SAFE simply waits until the next round and then converts. Because nobody has to agree a valuation today, a SAFE can be signed in days and at very low legal cost, which is why it has become the default for pre-seed and seed rounds.
Caps and discounts — how the investor gets rewarded
- Valuation cap: the maximum company valuation at which the SAFE converts. If your next round prices the company above the cap, the SAFE-holder converts as if the valuation were the cap — rewarding them for backing you early.
- Discount: a percentage off the price per share paid by new investors in the priced round (commonly 10–20%).
- Cap and discount together: where a SAFE has both, it usually converts at whichever gives the investor the better (lower) price.
- Uncapped: a SAFE with no cap converts only by reference to the next round’s price (and any discount). It is the most founder-friendly and the hardest to raise on.
- MFN (most favoured nation): lets an early SAFE-holder adopt better terms you later grant to another SAFE — protecting the first money in.
A SAFE defers the valuation conversation; it does not remove it. When the SAFE converts, the cap and discount can translate into meaningful dilution. Always model what your cap table looks like after all outstanding SAFEs convert, before you sign the next one.
What a priced round is
In a priced round, you agree a valuation today, issue shares at a fixed price per share, and the investor becomes a shareholder immediately. It takes longer and costs more — you negotiate a term sheet, then a subscription and shareholders’ agreement, with warranties, board rights and reserved matters — but everyone knows exactly what they own from day one. Priced rounds suit larger raises and lead investors who want governance rights now.
How to choose
- Choose a SAFE when speed and low cost matter, the round is small, you have many small cheques, or you genuinely cannot yet price the company.
- Choose a priced round when a lead investor wants a defined stake and board rights, the raise is large enough to justify the legal cost, or you want a clean, settled cap table.
- Either way, start the conversation behind a mutual NDA, and capture the headline terms — cap, discount, amount — in writing before lawyers are engaged.
In the document engine you can prepare a SAFE with your cap, discount and MFN choices, or an investment term sheet for a priced round — both as fillable templates that generate a clean PDF you can sign with an audit trail.