#The SAFE — A Simple Promise Invented by Y Combinator
The SAFE (Simple Agreement for Future Equity) is an investment instrument Y Combinator introduced in 2013. It's a promise to take money now and convert it into preferred stock at the next qualified financing round — a promise of future equity, not debt. With no maturity date and no interest, its terms are refreshingly simple.
- Legal character — not debt, no maturity date
- Interest — none
- Conversion trigger — the next qualified financing round (e.g., Series A)
- Key terms — valuation cap, discount rate, and the Most Favored Nation (MFN) clause
#Convertible Notes — Debt With Maturity and Interest
A convertible note is debt — the investor is repaid principal plus interest at maturity, or holds the right to convert into preferred stock at the next round instead. In Korea, it's used less often than SAFEs at the seed stage, but its strength is that it's a structure clearly recognized under commercial law.
- Legal character — debt (a bond/note)
- Interest — typically 1-5% annually, accrued and paid at maturity
- Maturity — typically 12-24 months, at which point it either converts or gets repaid
- Key terms — cap, discount, interest rate, and maturity date
#Key Comparison
| Item | SAFE | Convertible Note |
|---|---|---|
| Legal character | A promise of equity (not debt) | Debt (a note) |
| Maturity | None | 12-24 months |
| Interest | None | Typically 1-5% |
| Conversion trigger | A qualified financing round | A qualified financing round, or maturity |
| Founder risk | Low (no maturity pressure) | High (repayment obligation at maturity) |
| Investor protection | Weaker | Stronger (creditor status) |
| Contract complexity | Low | Medium |
#Valuation Cap and Discount — Terms Common to Both
Both SAFEs and convertible notes rely on two core variables to determine the price at which they convert into preferred stock at the next round: the cap and the discount. When both apply, whichever is more favorable to the investor is the one that's used.
| Variable | Definition | Example |
|---|---|---|
| Valuation Cap | The maximum company valuation applied at conversion | Cap of ₩5B → even if Series A prices at ₩10B, conversion happens on a ₩5B basis |
| Discount | A discount applied to the next round's price | 20% discount → converts at 80% of the Series A price |
| MFN | Automatically matches better terms given to a later SAFE | Protects investors in concurrently issued SAFEs |
Set the cap too low, and even strong growth in company value means a disproportionate share flows back to the seed investor, driving up dilution at later rounds. Some structures use only a discount with no cap, but in the Korean market, the cap is standard.
#From a Founder's Perspective — Which One Is Better
| Situation | Recommended Structure | Why |
|---|---|---|
| Series A clearly expected within 12 months | Either SAFE or convertible note works | The short conversion window means the risk is roughly equal either way |
| Series A uncertain, 18+ months out | SAFE recommended | A note's maturity date brings repayment risk |
| Investor insists on creditor status | A convertible note is unavoidable | Emphasizes investor protection |
| Typical domestic angel or seed fund | A SAFE-style structure | Simple, closes quickly |
| Strategic investor requiring guarantees | A convertible note | Legal certainty |
#Self-Check: A Founder's Checklist
- Is your next qualified round (e.g., Series A) expected within 12 months, or 18+ months out?
- Is the investor insisting on creditor status via a convertible note, or are they open to a SAFE?
- Have you reviewed all three terms — cap, discount, and MFN?
- If you've issued multiple SAFEs or notes, have you simulated your remaining ownership after they all convert at Series A?
- If it's a convertible note, do you have a plan — starting six months before maturity — for repayment, refinancing, or conversion?
- Have you had local counsel review the agreement and flag any deviations from the standard template?
Simulate Your SAFE or Note Conversion Alongside Your Business Plan
Our CFO agent quantifies cumulative dilution and flags maturity risk.
Pre-submission business-plan review with clear service limitations
Start OpenSeed Review →