SAFE

Quick Facts

Full name: Simple Agreement for Future Equity

Created by: Y Combinator (2013)

Updated: Post-money SAFE released in 2018

Key terms: Valuation cap and/or discount

Converts: At next priced equity round

A SAFE (Simple Agreement for Future Equity) is an investment instrument that gives investors the right to receive equity in a future financing round. Created by Y Combinator in 2013, SAFEs have become the dominant form of early-stage startup financing because they're simpler and faster than convertible notes.

In Plain English

A SAFE is an IOU for future equity. An investor gives you money now, and you promise to give them shares later—when you raise a "real" round with a price per share. The SAFE specifies the terms of that conversion: typically a valuation cap that rewards the investor for taking early risk.

How SAFEs Work

Investment: Investor gives you $100K via SAFE
You operate: Build the company without equity being issued yet
Priced round: You raise Series A at $10M valuation
Conversion: SAFE converts to shares at advantageous terms
Result: Investor receives equity based on SAFE terms

Key Terms

Valuation Cap

The maximum valuation at which the SAFE converts to equity:

Example: $100K SAFE with $5M cap

If Series A is at $10M: Investor converts at $5M cap = 2% ownership
If Series A is at $4M: Investor converts at $4M = 2.5% ownership

The cap protects early investors from excessive dilution if the company's value increases dramatically.

Discount

A percentage reduction from the Series A price:

Example: $100K SAFE with 20% discount

Series A price: $1.00 per share
SAFE conversion price: $0.80 per share
Investor gets 25% more shares than Series A investors

Cap + Discount

Some SAFEs include both—investor gets whichever is more favorable:

Example: $100K SAFE with $5M cap AND 20% discount

Series A at $10M, $1/share
Cap gives: conversion at $0.50/share
Discount gives: conversion at $0.80/share
Investor takes the cap (better deal)

MFN (Most Favored Nation)

No cap or discount, but if the company issues SAFEs with better terms later, this SAFE automatically gets those terms.

Pre-Money vs. Post-Money SAFEs

Pre-Money SAFE (Original, 2013)

Ownership calculated before SAFE money counted
Multiple SAFEs dilute each other upon conversion
Harder to calculate exact ownership
Uncertainty for both founders and investors

Post-Money SAFE (Current Standard, 2018)

Ownership calculated after all SAFE money counted
Clear ownership math: Investment ÷ Cap = Ownership %
Each SAFE's ownership is independent
Example: $500K at $5M post-money cap = exactly 10%

Y Combinator recommends the post-money version because it eliminates ambiguity.

SAFE vs. Convertible Note

Feature	SAFE	Convertible Note
Interest	No	Yes (typically 5-8%)
Maturity date	No	Yes (18-24 months)
Repayment obligation	No	Yes (technically)
Complexity	Simple	More complex
Legal costs	Lower	Higher
Investor protections	Fewer	More

SAFEs favor founders; convertible notes give investors more protection.

Conversion Example

Scenario:

Company has 8M shares outstanding
Raises $2M via SAFEs at $10M post-money cap
Later raises Series A: $5M at $20M pre-money ($25M post-money)

SAFE Conversion:

$2M ÷ $10M cap = 20% ownership at conversion
Series A investors: $5M ÷ $25M = 20% ownership
Founders: ~60% (diluted from original ~80%)

The SAFE "Stack" Problem

Multiple SAFEs can stack up before a priced round:

Founder ownership:        100%
After $500K SAFE ($5M):   ~90%
After $500K SAFE ($8M):   ~84%
After $500K SAFE ($10M):  ~79%
At Series A conversion:   ~55-60%

Founders often underestimate cumulative SAFE dilution.

When SAFEs Convert

SAFEs typically convert upon:

Equity financing: The standard trigger (Series A)
Liquidity event: Acquisition or IPO
Dissolution: Company shuts down (investor loses money)

Best Practices

For Founders:

Track SAFEs carefully on your cap table
Model the fully-diluted impact before signing
Use post-money SAFEs for clarity
Don't raise too much via SAFEs (limits Series A options)

For Investors:

Understand post-money vs. pre-money implications
Get pro-rata rights for the Series A
Consider the cap relative to realistic Series A valuations
MFN clauses provide minimal protection

Practical Takeaways

For founders: SAFEs are founder-friendly and fast, but don't let their simplicity fool you. Each SAFE dilutes you. Model your cap table carefully and understand how SAFEs convert at various Series A scenarios before signing.

For investors: SAFEs offer less protection than convertible notes—no interest, no maturity, no repayment right. Make sure the cap reflects genuine early-stage risk, and negotiate pro-rata rights for follow-on investment.

Cap Table — Where SAFEs appear (and convert)
Down Round — What happens if Series A is below the cap
Anti-Dilution Provisions — Protections SAFEs don't typically include