A Simple Guide – ycombinator. (2024)

A Simple Guide – ycombinator. (1)Understanding the Y Combinator SAFE Note can be crucial for startups and investors alike. The Simple Agreement for Future Equity (SAFE) note is a financing instrument that has grown in popularity for its straightforwardness and efficiency in early-stage investment rounds. This guide aims to provide a comprehensive overview of what SAFE notes are, how they work, and their advantages and disadvantages for both startups and investors.

What is a SAFE Note?

The SAFE note is a financial instrument created by Y Combinator, a well-known startup accelerator, to simplify the process of investing in early-stage startups. SAFE stands for Simple Agreement for Future Equity. It is an agreement between a startup and an investor that provides the investor the rights to equity in the company at a later date, under specific conditions. Unlike traditional convertible notes, SAFE notes do not accrue interest and do not have a maturity date, making them simpler and potentially less costly.

How Does a SAFE Note Work?

At its core, a SAFE note is an agreement that allows an investor to purchase shares in a future equity round, typically at a discounted price or with a valuation cap, or sometimes both. The investment does not convert into equity until a predetermined triggering event occurs, usually the next round of equity financing. This structure allows startups to receive funds without having to determine the company’s valuation immediately, which can be challenging in the early stages of development.

Key Components of a SAFE Note

  • Valuation Cap: A maximum valuation at which the SAFE converts into equity, protecting investors from dilution in subsequent financing rounds.
  • Discount Rate: Offers investors a discount on the share price during the equity financing round.
  • Pro-rata Rights: Gives investors the option to maintain their percentage ownership in subsequent funding rounds.

Advantages and Disadvantages

For Startups

  • Advantages:
    • Flexibility in fundraising without immediate valuation.
    • Simplified legal and administrative processes.
    • Deferred equity allocation.
  • Disadvantages:
    • Potential for dilution in future equity rounds.
    • Lack of debt structure may be less attractive to some investors.

For Investors

  • Advantages:
    • Potential for high returns on investment.
    • Protection mechanisms like valuation caps and discount rates.
  • Disadvantages:
    • Uncertainty regarding the timing of conversion into equity.
    • Potential for significant dilution without a valuation cap.

Real-World Examples

Let’s consider a startup that raises $100,000 through a SAFE note from an investor with a 20% discount rate and a $5 million valuation cap. When the startup next raises equity financing at a $10 million valuation, the SAFE note converts into equity at the $5 million cap, giving the investor more shares than if the investment had been converted at the $10 million valuation, thanks to the discount rate and valuation cap.

Understanding the Legal Implications

While SAFE notes offer simplicity, it’s essential for both startups and investors to understand the legal implications fully. Ensuring clarity around terms like conversion triggers and post-money valuation caps can help avoid future disputes. Consulting with an experienced legal advisor is highly recommended to tailor the agreement to the specific needs of the involved parties.

Useful Resources


SAFE notes offer a streamlined and effective way for startups to secure early-stage funding without immediate valuation, benefiting both startups and investors with their simplicity and flexibility. However, understanding the intricacies of how they operate and the legal implications is critical to leveraging their advantages fully. Startups should consider the potential for future dilution, while investors should weigh the lack of immediate equity and the conditions under which their investment will convert into shares. For various use cases, SAFE notes can be the best solution:

  • For risk-tolerant investors looking for potentially high returns through early-stage investments.
  • For startups in their initial phases seeking quick and flexible funding without the complications of immediate valuation.
  • For founders preferring to delay equity dilution and retain control in the early days of their venture.

In any scenario, ensuring both parties are well-informed and work with knowledgeable legal counsel can help maximize the benefits of SAFE notes while mitigating potential downsides.


What is a SAFE note?

A SAFE note (Simple Agreement for Future Equity) is a financial instrument used for early-stage startup investments, giving investors the right to future equity under specific conditions without immediate equity transfer or valuation.

How does a SAFE note convert to equity?

A SAFE note converts to equity during a future equity financing round, based on predetermined conditions such as a valuation cap or discount rate, providing investors with a share of the company at potentially favorable terms.

What are the advantages of using SAFE notes for startups?

SAFE notes offer startups the flexibility to raise funds without immediate valuation, simplify legal and administrative processes, and defer equity allocation until a future financing round.

What are the disadvantages of SAFE notes for investors?

The main disadvantages for investors include uncertainty regarding the timing and terms of conversion into equity and the potential for significant dilution, especially without a valuation cap in place.

How can startups and investors mitigate the risks associated with SAFE notes?

Understanding the terms, consulting with legal advisors, and negotiating conditions such as valuation caps and discount rates can help both startups and investors mitigate risks and ensure clarity around SAFE note agreements.

We hope this guide has illuminated the fundamentals of Y Combinator’s SAFE Note. If you have further questions, corrections, or experiences you’d like to share, we encourage you to leave a comment or get in touch. Your insights could greatly benefit others navigating the early-stage investment landscape.

A Simple Guide – ycombinator. (2024)


Is the Y Combinator hard to get into? ›

If you're a founder or employee at a startup you may have heard of Y Combinator. It's one of the most sought-after Silicon Valley accelerators that's harder to get into than Harvard and a complete game-changer for startups. Depending on your source, the Y Combinator acceptance rate is between 1.5% to 3%.

What percent of YC companies succeed? ›

Roughly 90% of startups end in failure. (YC is an exception; more than 50% of YC companies are still alive 5 years later.) Here are some other reasons why you might want to reconsider working at a startup.

What is the 90 10 solution? ›

Many successful early-stage startups follow the 90/10 Rule: do what gets you 90% of the solution with 10% of the effort. This rule emphasizes the need for efficiency and prioritization in your business operations.

How long is the Y Combinator interview? ›

YC interviews are 10-minute conversations over Zoom. All founders should be present on the call. Expect 2-3 YC Partners to be on the call. Interviewers will have read your application and have it open during the call.

What is the average age of YC? ›

Basically, the age distribution of YC companies is pretty close to the age distribution of applicants. More YC founders are 25 than 35, but more 25-year-olds apply than 35-year-olds. (Paul has an essay where he says the ideal range to start a startup is 22-38. As far as I know, that isn't a rule, just a suggestion.

Is the Y Combinator a waste of time? ›

I do agree that Y Combinator is waste of time for most start-up founders. Instead of begging for money from old start-up lottery winners, focus on sales and own your company completely. Y combinator and other VCs should be your last option, not your first.

How quickly does YC get back to you? ›

Most interviews will be held by video conference from April to early June. We typically make decisions the same day as your interview, and we give everyone who interviews detailed feedback on our decision. We invest in companies as soon as they are accepted; we do not wait for the batch to start.

How much does a founder at YC make? ›

$164K (Median Total Pay)

The estimated total pay range for a CEO Founder at Y Combinator is $123K–$230K per year, which includes base salary and additional pay. The average CEO Founder base salary at Y Combinator is $164K per year.

How much do YC partners get paid? ›

$24,000 a year (legal minimum). most YC partners don't take a salary beyond this but we get a lot of equity.

What is the 90 10 rule? ›

The 90–10 rule refers to a U.S. regulation that governs for-profit higher education. It caps the percentage of revenue that a proprietary school can receive from federal financial aid sources at 90%; the other 10% of revenue must come from alternative sources.

What is the 10 90 reaction? ›

10% of life is made up of what happens to you. 90% of life is decided by how you react.

What is the 10 90 formula? ›

The 90/10 Principle was popularized by Stephen Covey, the amazing author of The 7 Habits of Highly Effective People. It states that: 10% of life is made up of what happens to you, and 90% of life is decided by how you react. We truly have no control over 10% of what happens to us.

Is getting into the Y Combinator a big deal? ›

Entry to Y Combinator is highly sought after, with startups around the world looking not just for the $500,000 investment but also one of the most prestigious networks in tech. Other companies seeded by Y Combinator include Airbnb, Coinbase, Dropbox, Instacart and Reddit.

What are the odds of getting into Y Combinator? ›

Since 2005, Y Combinator has funded over 3,000 companies and worked with over 6,000 founders. Every 6 months over 10,000 companies apply to participate in our accelerator and we typically have a 1.5% - 2% acceptance rate.

Is there an age limit for the Y Combinator? ›

No, they are not too old. It's a myth that YC is only for 22-year-olds. The very first batch may have looked like that but that's not the case anymore. I was 33 when I started YC, and I remember doing some rough math and figured out that at least a third of the batch was in their 30s or 40s.

Is the Y Combinator prestigious? ›

Brand Prestige and Reputation

The Y Combinator brand has immense prestige.

How many people get accepted to YC? ›

According to Y Combinator , the Startup School receives over 15,000 applications each year , but only accepts around 5,000 participants . This means that the acceptance rate for the Startup School is less than 33 % , making it a highly competitive program .


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