What is a SAFE note and how does it benefit early investors in a startup?

The process of converting SAFE notes into Preferred shares in a company typically occurs during a future funding round when the company's valuation is better defined. An investor who has a SAFE note, or Simple Agreement for Future Equity, has the right to buy shares in the company without establishing a valuation at the time of initial investment. When a professional investor later conducts a comprehensive financial analysis and determines the company's valuation, the SAFE note investors can convert their SAFE notes into Preferred shares at the same valuation. They may also receive an extra discount or reward for being an early investor.

A SAFE note, or Simple Agreement for Future Equity, contributes to the control dynamics between founders and investors in a startup by allowing investors to buy shares in the company without establishing a valuation. This means that the investor gives money to the startup with the understanding that the startup will raise more funding in the future when their valuation is better defined. When a professional investor later determines the company's valuation, the SAFE note investors can convert their SAFE notes into Preferred shares of the company at the same valuation, but with an extra discount or reward for being an early investor. This can shift control dynamics as it can potentially increase the stake of early investors in the company.