Breaking into Venture: SAFE notes. Are they really that safe?

At Hack & Hustle we believe that genius is global & hate that opportunity isn’t. Despite the potential of the European Single Market, start-ups have difficulties in growing as fast as their American counterparts. The availability of capital is a key catalyst for a thriving start-up ecosystem. In this respect, Europe lags behind. The European venture capital industry is smaller, less attractive and barriers to cross-border investment persist.

As you can probably tell, the development of venture investing in Europe is one of our main passions. We are hustling to become leaders of tomorrow and play a strong role in fostering a borderless European venture-investing ecosystem. We want to push boundaries; but being a leader is also about giving the future a voice. It’s about empowering talent to grow and develop. It’s about collaborating to write the history of the future. It’s about challenging people to become the best version of themselves.

This is why we are constantly working and supporting young talents by letting them join us in the trenches and learn about this wonderful world of venture. If you are looking to break into venture, do reach out to us. The “Breaking Into Venture” series is the result of us challenging our interns and trainees to develop an article on some of the basics of the venture world they learned whilst working with us.

Francisco Portugal Gaspar

Francisco is a Master’s student in Electrical and Computer Engineering at Instituto Superior Técnico, highly interested in problem-solving, design thinking and teamwork experiences with an eager to learn more. During his work and academic experience, he has developed a passion for the areas of Software Engineering, QA Testing, Innovation Consultancy, Telecommunications and Machine Learning.

When I think about startups the only thing that comes to mind is the stories of the successful ones. Normal right? We always dream about the big things in life! We always try to live our lives to the fullest. I think about how cool it must be to have an amazing idea and work in something that I created myself… But not everything is easy. Some things in life are easy, but creating a business, being bold enough to pursue a dream despite the high risk of failure and still being able to invest in your idea and keep moving forward…that’s not easy at all.

I don’t know if you are familiar with the movie “Meet the Robinsons”, but that movie always made me dream about achieving great things in life when I was a young kid. The movie is about a child that travels in time to meet his mother, but he ends up meeting another kid who is actually his own son. I’m not going to enter in detail but it is pretty awesome! What I wanted to highlight from the movie is that this kid manages to create a time machine, an epic invention, all by himself! I believe that anyone can, if motivated, create his own idea and work hard to make it a reality!

Of course, this is a movie…We do not live in a movie and we need to know how to live in our reality. So, we need to understand how to pursue our dreams in our reality and to create something, like a startup in our world!

One important concept to know when thinking of starting a startup are SAFEs.

The first time I heard this term I thought: “If this is not good… why call it SAFE?”. Well, still today, I think that this is valid thought. SAFE means Simple Agreement for Future Equity. What is this mystery then?

I remember searching all about SAFEs and trying to understand everything I could. It was all very new to me. Every time I found something that I was understanding then, out of the blue, I felt lost again. This happened because to understand some parts of SAFEs I had to know of other concepts that I wasn’t familiar with.

This is my modest attempt at explaining SAFEs and why you should know everything you can about them! This is the simplest explanation I could muster, whilst still trying to be in-depth enough.

I have no clue what SAFEs are…please help me!!

SAFE, as I said, stands for Simple Agreement for Future Equity. It’s actually quite simple!

SAFE notes are documents that startups use to raise seed capital. Let’s divide it into parts:

  • Simple Agreement: This is a direct assumption. It means that it’s just a contract between two entities; and well, it’s supposed to be a simple one;
  • Future Equity: This is the tricky part! It means that the investor receives cash or equity if the startup meets some specific criteria.

Basically, it’s this. I want to create a startup, an investor finds my idea appealing and he invests. We make an agreement that in the future he will receive some equity of my startup. How does he receive this equity? When one of the following occurs:

  • Equity financing: Process of raising capital through the sale of shares. By selling shares, companies sell ownership in their company in return for cash.
  • Dissolution event: Stockholders of a startup (or company for this matter) approve a plan of complete dissolution (when a company ceases to exist as an entity)

One important concept to fully grasp is Equity financing.

Why do I need to know about “Equity Financing”? Wasn’t this about SAFEs?

Here we go again…Not having a clue about a specific term in this new world. Through this process I am just finding that I must embrace the little knowledge I have on certain things to really understand them! So, before I continue rambling on SAFE notes, I just need to talk a little about this Equity Financing thing. It’s fast don’t worry. The process of a start up to become a huge company is a very hard one and takes a lot of time…start ups are defined, by size, revenue and other factors. Namely series A,B,C…but before this they are in the seeding phase and there’s also the pre-seeding.

What are this series? Well, they are the different processes of a start up to grow! When a start up goes from seeding phase to series A it receives some investment from a certain investor, and this agreement can be made using a SAFE note! I told you that it would be important to know this part… If a start up is in the seeding phase the next Equity Financing is going to be the series A financing. In this phase the start up is safer to bet and attracts more investors, so the first investor can continue or exit this process and receive his equity that by that time is the future base on the time that the first agreement was made! That’s why it’s called Future Equity!

Just to finish this part…A start up goes through different investment rounds and when a SAFE is signed in one of them it can trigger in the next phase of investment…That’s it! Let’s continue with the SAFE notes.

Back to SAFE notes: key terms to know by heart!

By now, I have a clearer idea of what SAFE notes are. They are no longer this mysterious thing and I understand they are a type of agreement made between startups and investors. But let’s dig in a little deeper and understand the key terms. And above all, understand why they were created in the first place.

SAFE notes are contracts by which an investor makes a cash investment into a company in return for the rights to subscribe for shares in the future.

Like everything in this world, they were created for a reason. Allow me to tell you the key terms regarding SAFE notes:

  • Valuation Cap: The valuation cap is a way to reward seed stage investors for taking on additional risk. The valuation cap sets the maximum price that your convertible security will convert into equity;
  • Discounts: Mechanism to reward the noteholders for their investment risk by granting to them the right to convert the amount of the loan at a reduced price, in percentage terms (Example: $500,000 SAFE note seed financing -> 20% discount -> Price per share of the Series A Preferred Stock = $1.00 à Conversion Price = $1.00 *(1-discount%) = $0.80 à $500.00/$0.80 = 625,000 shares;
  • Most Favored Nations (MFN) -> à Clause that allows the SAFE holder to elect to inherit any more favorable terms that are offered to any subsequent investors.

These are the most important terms to know. Not so hard now right?! I would like to add just another thing! The difference between a SAFE note and a Convertible Note. Yes I know, another new concept. Just think that by adding just this one more concept you are learning so much more!

SAFE vs Convertible Notes…The ultimate showdown!

So, SAFE notes are not alone in this world, they share their existence with their relative Convertible Notes. Why were two different notes created, you may ask. We already talked about SAFE notes, so let’s just discuss what are convertible notes.

Convertible Notes are a form of short-term debt that converts into equity, typically in conjunction with a future financing round. Here, the investor loans money to the startup and instead of a return in the form of principal plus interest, the investor receives equity in the company.

What is then the difference between SAFE and Convertible notes?! Well, if you noticed the term Debt you are a keen observer! If not don’t worry.

SAFEs are a simpler alternative to convertible notes. Unlike convertible notes, SAFEs are not debt, so they don’t include:

  • Interest Rate: Amount a lender charges for the use of assets expressed as a percentage of the original money lent. The interest rate benefits investors that invested early in the startup (Original value + Original value*Interest Rate);
  • Maturity Date: Date at which the money lent by the investor needs to be paid back.

SAFE notes…The final part of this tale!

  • SAFE notes provide an easy way for founders to raise money in a seed round;
  • There are very little legal complexities;
  • SAFEs are not debt and, unlike convertible notes, have no Interest Rate and Maturity Date;
  • The key terms are Valuation Cap, Discounts and Most Favored Nations


    • João Moreira Pires says:

      Hi Gonçalo, we’re glad you found the article interesting!
      answering your question: Yes, SAFE notes are applicable in Portugal.
      Please feel free to reach out to for more detailed info.

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