Quick facts
- Full name: Simple Agreement for Future Equity
- Introduced: late 2013, by Y Combinator
- Current standard form: the post-money safe, released 2018
- Main term: a valuation cap, a discount, or both
- Becomes shares: at your next priced round
A SAFE (Simple Agreement for Future Equity) is an agreement that takes money now and gives shares later. Y Combinator introduced it in late 2013 and released the post-money version that is now standard in 2018.1 It is not a loan and not stock. It is a contractual right to shares that converts when you raise a priced round.
In plain English
A SAFE is equity you have sold without yet issuing the shares. The investor wires money today, and on the day you close a priced round they receive stock on terms the SAFE set months or years earlier. Nothing appears on your cap table as a percentage until that day, which is precisely why founders lose track of how much they have given away.
The valuation cap and the arithmetic that matters
A valuation cap is the maximum valuation at which the SAFE converts. With the post-money safe, ownership is measured after all the safe money is counted but before the new priced round comes in.1 That makes the calculation unusually simple:
investment divided by the post-money valuation cap equals the ownership sold
A $1,000,000 SAFE at a $10,000,000 post-money cap is 10% of the company. Orrick frames the same point as thinking in dilution rather than valuation: raise $1,000,000 on a $10,000,000 post and you are looking at roughly 10% dilution.2
This is the number to hold on to. Not the valuation, which flatters you. The percentage, which does not.
The discount
A discount gives the SAFE holder a reduction from the price your priced-round investors pay. On a $1.00 per share round, a 20% discount converts the SAFE at $0.80, so the same money buys 25% more shares.
Some SAFEs carry a cap and a discount, and the investor receives whichever produces more shares. Others carry neither and rely on MFN (most favoured nation), a clause that lets the holder adopt the better terms of any SAFE you issue later. MFN sounds harmless when you sign it. It means your next negotiation is retroactive.
Pre-money and post-money safes
The original 2013 safe was pre-money. Ownership was calculated before the safe money was counted, so multiple safes diluted each other and nobody could state their percentage with confidence until conversion.
The 2018 post-money safe fixed the ambiguity by treating the safes as their own round, measured after all safe money and before the new money.1 It is clearer. It is also less forgiving, because the clarity is about how much you sold, and the answer is usually more than the pre-money version implied.
What conversion actually does to your percentage
These percentages are quoted on a fully diluted basis, meaning the total counts everything that could become a share rather than only shares already issued.3
Start with founders holding 8,000,000 shares and nothing else outstanding.
Step one, the safe. You raise $2,000,000 on a $10,000,000 post-money cap. That is 20%. Founders keep their 8,000,000 shares and now hold 80%, so the company is treated as having 10,000,000 shares, with 2,000,000 behind the safe.
Step two, the priced round. You raise $5,000,000 at a $20,000,000 pre-money valuation, which is $25,000,000 post-money, so the new investor takes 20%. The total becomes 12,500,000 shares.
- Founders: 8,000,000 of 12,500,000 = 64%
- Safe holders: 2,000,000 of 12,500,000 = 16%
- Series A: 2,500,000 of 12,500,000 = 20%
Founders went from 100% to 80% on the safe, then to 64% on the round. Note that the safe holders were diluted too. Converting does not exempt them from the round they helped you reach.
The stacking problem
One safe is easy to reason about. Four safes at four different caps, signed over eighteen months, are not. Founders who raise multiple safe rounds at different valuations over different periods routinely discover at conversion that they own considerably less of the company than they believed.2
The failure is not arithmetic. It is that each individual safe felt small, and nobody added them up while there was still time to stop.
Add them up now, before the next one.
SAFE compared with a convertible note
| SAFE | Convertible note | |
|---|---|---|
| Legal form | Contract for future equity | Debt |
| Interest | None | Usually carries interest |
| Maturity date | None | Yes |
| Repayment right | None | In principle, yes |
| Complexity and legal cost | Lower | Higher |
| Investor protections | Fewer | More |
A note that matures while you are still raising becomes a negotiation you conduct from a weak position. A SAFE removes that deadline, which is the main reason founders prefer them and the main reason some investors do not.
When a SAFE converts
Conversion is triggered by a priced equity round, and the documents also address what happens on an acquisition or a wind-down. Read those sections rather than assuming, because they decide what a safe holder receives if you sell the company before ever raising a priced round.
What to do next
List every outstanding safe with its amount and cap. Divide each amount by its cap, add the percentages, and treat the total as sold. Then model the round with those percentages in place, and read how post-money safes dilute founders for the version with the edge cases.
If the total surprises you, that is the finding. Better now than at conversion.
Related reading
- Cap Table covers where safes should be tracked from the day you sign
- Down Round covers what happens when the priced round comes in below the cap
- Anti-Dilution Provisions covers the protections a priced round adds that safes usually lack
- Pro-Rata Rights covers the follow-on right safe investors often negotiate separately