Raising money without setting a price yet
Pricing a company at pre-seed is genuinely hard, there's often too little evidence to defend a specific valuation. A SAFE (Simple Agreement for Future Equity) and a convertible note both solve this by letting an investor put in money now that converts into equity later, at the next priced round, rather than fixing a valuation today. A SAFE is not debt and has no maturity date or interest; a convertible note is technically a loan, with interest and a maturity date, that converts instead of being repaid.
The two terms that decide the price
- Valuation cap: the maximum valuation the SAFE converts at, protecting the investor if the next round prices much higher.
- Discount: a percentage off the next round's price, rewarding the investor for coming in earlier and taking more risk.
Most SAFEs include a cap, a discount, or both, and the investor converts at whichever mechanism gives them the better price. A Most Favored Nation (MFN) clause is a third, simpler option: the investor's terms automatically match the best terms given to any later SAFE investor in the same round.
Worked conversion example
An investor puts in $200k on a SAFE with a $6m cap and a 20% discount. The next priced round comes in at a $10m pre-money valuation ($12.50/share equivalent for simplicity).
| Mechanism | Effective conversion price | Shares for $200k |
|---|---|---|
| Via the $6m cap | $7.50/share (cap ÷ implied share count) | ~26,667 |
| Via the 20% discount | $10.00/share (20% off $12.50) | ~20,000 |
| Investor converts at | $7.50/share (the better price) | ~26,667 |
This is the mechanic worth internalizing: whichever of cap or discount is more favorable to the investor at conversion time is the one that applies, which is exactly why the cap matters so much to negotiate carefully even though no price is being set today.
Checkpoint
- SAFE: not debt, converts to equity at the next priced round, no maturity date.
- Convertible note: technically debt, with interest and a maturity date, that converts instead of being repaid.
- Cap and discount: the investor converts at whichever gives the better price.
- MFN: automatically matches the best terms given to any later SAFE investor.
If anything here still feels unclear, ask before moving to Lesson 15.