SAFEs as (New) Financing Instruments

Similar to convertible promissory notes, the prototypical SAFE allows a company to raise capital upfront with the expectation of later converting that liability into shares of next-round preferred stock. In other words, in exchange for putting in capital today, an investor gets to convert the SAFE into next-round shares at a fixed percentage discount on the purchase price paid by new-money investors. There is less urgency to independently confirm a given valuation of a company or worry about a company underperforming projections; as long as the company raises money in a priced round at a fair price, the investment will convert to equity at a favourable rate at the time of conversion. [...]this approach also comes with a risk - in the event that the value of a company does not grow as expected (ie, does not exceed the valuation cap), a valuation cap-only SAFE will simply convert at the same price per share paid by new investors, and the SAFE investor receives no excess benefit for the risk related to the earlier investment.