When raising money for the first time, you will confront a lot of complicated terminology you haven’t heard before.

Here is your guide to figuring out the paperwork and mechanics of raising money:

SAFE: Simple Agreement For Future Equity

SAFE stands for Simple Agreement for Future Equity — and it’s the quickest and easiest way of getting started raising money.

Here’s how a SAFE works:

• The investor sends you money today in promise of equity in the future. This typically happens at the next round.
• In return, you give the investor either a valuation cap or a discount or both. This protects the investor and locks in a lower price for them even if the next round is at a much higher price.

Unless there is a very good reason otherwise, you want to raise your first round of funding on a SAFE since it postpones a lot of cost and complexity.

How Valuation Caps and Discounts Work

Your SAFE note typically has a “valuation cap” — these can be set up in one of two ways:

Pre-Money Valuation Cap: This is the maximum valuation the investor will pay on a pre-money basis. This is more beneficial to you as a founder since you can keep adding multiple new rounds of financing on top — and when the investor calculates how much they own, all the new rounds will have to be considered.

Post-Money Valuation Cap: This is easiest to understand and better for the investor

Advantages of a SAFE

• Standard paperwork and does not require any lawyers or any legal fees.