Understanding SAFEs

7 min read

By Kevin — CPA, MBA, CEO of IOL Inc.

If you're raising your first round of funding in the Philippines, you'll almost certainly encounter SAFEs or convertible notes. These instruments let investors put money into your startup without agreeing on a valuation today — the valuation gets decided later, at your first priced round. Understanding how they work is critical because the terms you agree to now determine how much of your company you give up later.

What Is a SAFE?

A SAFE (Simple Agreement for Future Equity) was created by Y Combinator in 2013 to simplify early-stage fundraising. It's not a loan — there's no interest rate, no maturity date, and no repayment obligation. Instead, the investor gives you money now in exchange for the right to receive equity later when a "trigger event" happens (usually a priced funding round).

The modern YC SAFE is "post-money" — meaning the valuation cap includes the SAFE itself. This is important: a ₱50M post-money SAFE with a ₱5M investment means the investor will own exactly 10% at conversion, regardless of how many other SAFEs you've issued. Founders sometimes miss this distinction and are surprised by how much dilution stacks up.

What Is a Convertible Note?

A convertible note is technically a loan that converts to equity. Unlike a SAFE, it has an interest rate (typically 4-8% annually) and a maturity date (usually 18-24 months). If the note hasn't converted by maturity, the investor can technically demand repayment — though in practice, most notes get extended or renegotiated.

The interest accrues and adds to the principal before conversion. So a ₱5M note at 6% interest held for 18 months converts as if the investor put in ₱5,450,000. This extra amount comes out of the founder's ownership, not the investor's pocket.

Valuation Caps and Discount Rates

Both SAFEs and convertible notes typically include two protection mechanisms for investors. At conversion, the investor gets whichever gives them a lower price per share (meaning more shares for their money).

The Valuation Cap

A cap sets the maximum valuation at which the SAFE converts. If your priced round is at ₱200M pre-money but the SAFE has a ₱50M cap, the SAFE holder converts at the ₱50M valuation — getting 4x more shares than new investors per peso invested. The cap rewards early investors for taking risk when your startup was unproven.

The Discount Rate

A discount (typically 15-25%, with 20% being standard) lets the SAFE holder buy shares at a percentage below the priced round price. If new investors pay ₱100 per share and the SAFE has a 20% discount, the SAFE holder pays ₱80 per share. The discount is simpler than a cap but offers less upside protection if your valuation grows dramatically.

Cap vs. Discount: Which Wins?

When a SAFE has both a cap and a discount, the investor converts at whichever gives them the lower effective price per share. If the company's valuation has grown significantly since the SAFE was issued, the cap usually wins. If growth was modest, the discount might give a better deal.

The Stacking Problem

Here's where Filipino founders most often get surprised: if you issue multiple SAFEs before your priced round, each one converts independently, and the dilution stacks. Three SAFEs of ₱5M each with a ₱50M post-money cap means 30% of your company goes to SAFE holders before your Series A investors even get their shares.

SAFEs in the Philippine Context

SAFEs are gaining traction in the Philippine startup ecosystem, but they're not as standardized as in Silicon Valley. A few things to watch for:

• Philippine corporate law doesn't have a specific legal framework for SAFEs. They're typically structured as subscription agreements with conversion provisions. Get a startup-savvy lawyer.
• Local angel investors may be more familiar with convertible notes. If your investor prefers notes, the economics are similar — just account for the interest accrual.
• SEC registration requirements apply to equity issuance. Plan for the paperwork and costs when your SAFEs convert at the priced round.
• Some Philippine accelerators and VCs have their own SAFE templates. Compare them carefully against the standard YC SAFE — look for differences in conversion triggers, pro-rata rights, and MFN clauses.

SAFE vs. Convertible Note: Which Should You Use?

For most early-stage Filipino startups, a SAFE is simpler and founder-friendlier: no interest, no maturity pressure, and cleaner legal documents. Use a convertible note when investors insist on it or when you need the psychological pressure of a maturity date to motivate reaching your next milestone.

Either way, model the conversion before you sign. Know exactly how much dilution you're taking on under different priced-round scenarios.