At YC, convertible debt has been replaced by SAFE. The acronym stands for simple agreement for future equity. It is like a convertible note without the interest rate, maturity, and repayment conditions. Both convertible note and SAFE allow for conversion into equity. The variations are also similar: cap, discount, or both.

In terms of differences, a SAFE is a 5-page document that was created by YC to streamline the seed investment process. Further, a convertible note allows for conversion when certain conditions are met, while SAFE allows for conversion in the next round of financing.

YC’s first safe was a “pre-money” safe. In 2018, “post-money” sage was introduced. In this post, I will try to explain the difference between the two.

As we have seen in the previous posts on a convertible note, there is no way for the investor to assess what percentage of the startup would she own in the future when the conversion happens. This is the key difference between pre-money and post-money SAFEs.

With a post-money SAFE, an investor can “lock-in” the percentage of the company that they will get to own when the conversion happens. For example, an investor who is giving you $500k for a valuation cap of $5M on a post-money SAFE, the investor gets to lock in 10% ownership in your startup. Please note the effect of dilution in this case. In the post-money case, subsequent SAFE investors would dilute the founders but would not dilute the existing SAFE holders.