Latest / The Series A Show with Fexingo: Early-Stage Funding, Pitch Decks, and Startup Milestones / Why More Startups Are Choosing SAFE Notes Over Priced Rounds
Transcript
- Lucas: If you're raising money as a startup in 2026, the first question you're probably asking isn't 'how much' — it's 'what kind of instrument.' And the answer, more often than not, is a SAFE note. Luna: SAFE being the Y Combinator creation — Simple Agreement for Future Equity. It's basically replaced the convertible note as the default for pre-seed and seed rounds. Lucas: Exactly. Y Combinator introduced it in 2013, and it's been quietly dominating ever since. But in the last couple of years, especially as late-stage valuations have gotten more volatile, we're seeing SAFEs become the norm even for companies that could theoretically do a priced round. Luna: And priced rounds — the traditional way, where you set a valuation and issue shares — those are still around, but they're more common for later stages or when you have a lead investor who wants a board seat. Lucas: Right. So let's break down why a founder might choose a SAFE. The core reason is speed and simplicity. A SAFE is typically a few pages, no valuation negotiation upfront, no board seats, no liquidation preferences. You agree on some key terms — a valuation cap, a discount rate, maybe a most favored nation clause — and you're done. Luna: And that valuation cap — that's the maximum price at which the SAFE converts into equity in a future round, right? So if you raise a Series A at a 20 million valuation, but your cap was 10 million, you get in at the lower price. Lucas: Yes. And the discount rate is similar — typically 15 to 20 percent off the next round price. So early investors get rewarded for taking the risk. But here's the thing: a SAFE is not debt. It doesn't accrue interest, and there's no maturity date. That's a big difference from convertible notes. Luna: Which is why founders like it. No payment obligations, no ticking clock. But for investors, it's riskier — you're essentially betting that there will be a priced round eventually. Lucas: And that's the key tension. Investors want protection. So we've seen more SAFEs with 'most favored nation' clauses, which let an investor adopt better terms offered to later SAFE holders. And some investors push for a discount rate AND a cap, or a higher cap with a lower discount. Luna: Let's make it concrete. Say you're a climate-tech startup — maybe something like the kind Convective Capital is funding. They just raised an 85 million dollar fund for disaster resilience. If you're a founder in that space and you want to raise 500,000 dollars, a SAFE with a 5 million cap and a 20 percent discount would be pretty standard. Lucas: Right. And if you hit it out of the park and raise a Series A at a 15 million valuation, your SAFE investors convert at 5 million — effectively tripling their money on paper. But if the Series A is at 4 million, below your cap, they convert at the discount — so 3.2 million effective valuation. Still a win. Luna: What about the downside? What if you never raise another round? Lucas: That's the big risk. With a SAFE, if there's no priced round, the investor gets nothing. They don't get their money back. So it's really only appropriate for startups that are likely to raise more capital or get acquired. For a lifestyle business, it doesn't make sense. Luna: And that's why we're seeing some investors push back — especially in sectors where exits are rare. But in the current market, with the IPO window still not fully open — you look at the data from today, companies like Palantir up 2.9 percent over five days, Airbnb up 1.4 percent — but still, very few IPOs. So late-stage investors are cautious, and that filters down to early-stage. Lucas: Yeah, and that's actually making SAFEs more attractive. Because if you do a priced round now, you might get a lower valuation than you'd like — the market's not as frothy as 2021. A SAFE lets you delay that valuation conversation until you have more traction. Luna: You see this in the data too. The ARK Innovation ETF, ARKK, is up 2.5 percent over five days — but that's after a brutal few years. So the risk appetite is returning, but cautiously. Lucas: And another trend: we're seeing more SAFEs with valuation caps that are actually quite high — I've seen ones with caps of 20 million for a pre-revenue company. That tells you investors are competing for deals. But it also means the cap is less meaningful as protection. Luna: Exactly. If the cap is too high, it defeats the purpose. A SAFE is supposed to reward early investors for risk. If you're effectively pricing the round at a 20 million valuation, why not just do a priced round? Lucas: That's the debate. Some investors now insist on a 'valuation cap plus a discount' or a 'most favored nation' to make sure they're not getting diluted by later SAFEs. And some founders are starting to use 'SAFE with a price round trigger' — so if you raise above a certain amount, it automatically converts. Luna: Interesting. So the instrument is evolving. Y Combinator updated the SAFE template in 2024 — added a 'crowdfunding' variant and clarified the MFN clause. So it's not static. Lucas: Right. And if you're a founder, the decision really comes down to: how confident are you in raising a priced round within 12 to 18 months? If you're confident, a SAFE is clean. If you're not, maybe a convertible note with a maturity date is safer for the investor, or maybe you should take a smaller priced round. Luna: I think a lot of first-time founders underestimate how much time a priced round takes. Legal fees, due diligence, board negotiations — it can drag on for months. A SAFE can close in a week. Lucas: And that speed can be decisive, especially if you're in a competitive space. Convective Capital, for example — they're investing in disaster resilience. If you're building wildfire detection tech, you don't want to spend three months negotiating a term sheet. You want capital now. Luna: Before we move on — this is probably a good moment to mention that if you're finding value in these deep dives, listener support is what makes this possible. We don't run ads — that's a deliberate choice. If you want to support that, buy me a coffee dot com slash fexingo is the place. Lucas: Yeah, it genuinely helps. Every contribution goes right back into producing more episodes like this one. And we really appreciate it. Luna: Alright. So let's talk about the specifics of a SAFE term sheet. What are the key terms a founder should negotiate? Lucas: First, the valuation cap. That's the most negotiated term. A lower cap is better for investors, but it also signals that you don't expect a huge valuation jump. For a typical seed-stage startup, caps range from 3 million to 10 million, but I've seen higher in hot sectors. Luna: Second, the discount rate. Usually 15 to 20 percent. Some investors will try for 25 percent if they're writing a big check. Lucas: Third, the most favored nation clause. This lets investors get the benefit of any better terms offered to later SAFE holders. If you issue a second SAFE with a lower cap, earlier investors can adopt that cap. It's a way to keep things fair without renegotiating. Luna: And there's also the 'pro rata' right — the right to participate in future rounds to maintain your ownership percentage. Some SAFEs include that, some don't. Lucas: Right. And one thing founders often miss: the 'exchange' mechanism. Some investors want the ability to convert the SAFE into equity at any time — like if the company is acquired. That's called an 'exit conversion.' It's standard but worth clarifying. Luna: So if you're raising on a SAFE, you should expect to have a cap and a discount. And if you're an investor, you should probably ask for an MFN clause. Anything else? Lucas: One more thing: the 'most favored nation' clause can sometimes trigger a cascade of conversions. If you issue a SAFE with a lower cap, all your earlier SAFE holders convert to that cap, which can dilute the founders more than expected. So founders should be careful about issuing multiple SAFEs at different terms. Luna: Good point. And that's partly why Y Combinator's new template includes a standard MFN — to simplify things. Lucas: So to wrap up: SAFE notes are the dominant early-stage instrument in 2026 because they're fast, simple, and defer valuation. But they're not risk-free. Founders need to understand the terms, and investors need to trust that there will be a priced round. If you're raising, spend more time on the cap and discount than on the legalese. Luna: And if you're an investor, make sure you have some downside protection — whether it's an MFN or a discount that's high enough to compensate for the risk. Lucas: Exactly. The SAFE is a tool, not a solution. Used well, it can get you from zero to product-market fit faster than almost anything else.