A SAFE (Simple Agreement for Future Equity) is a financing contract that allows investors to buy shares in a future priced equity financing round, rather than immediately receiving equity shares. Created by Y Combinator in 2013, SAFEs have become the preferred early-stage funding instrument for many startups and investors.
A Simple Agreement for Future Equity (SAFE) is essentially an investment contract that promises equity in a future financing round. Unlike traditional debt instruments, SAFEs are not loans—they don't have interest rates, maturity dates, or repayment obligations. Instead, they represent a right to receive equity shares when certain triggering events occur, typically when the company raises a priced equity round.
The SAFE was designed to simplify early-stage fundraising by eliminating many of the complex terms found in convertible notes while still providing investor protection through valuation caps and discount rates. This makes fundraising faster, cheaper, and less complex for both startups and investors.
The valuation cap is the maximum company valuation at which the SAFE will convert to equity. If a company raises a Series A at a $20M valuation but the SAFE has a $10M cap, the SAFE holder gets shares at the $10M valuation, effectively getting twice as many shares. This protects early investors from excessive dilution if the company's valuation increases significantly.
The discount rate gives SAFE holders the right to convert at a percentage discount to the price paid by new investors. A 20% discount means if Series A investors pay $1.00 per share, SAFE holders pay $0.80 per share. Some SAFEs have both caps and discounts, with conversion occurring at whichever is more favorable to the investor.
MFN clauses ensure that if the company issues another SAFE with better terms, existing SAFE holders automatically receive those better terms. This prevents companies from disadvantaging early investors by offering increasingly favorable terms to later investors.
These SAFEs only include a valuation cap. They're the simplest form and convert based on the cap regardless of the Series A price, unless the cap is higher than the Series A valuation.
These SAFEs provide only a discount to the Series A price. They're rarer because they provide less downside protection for investors, but they're founder-friendly as they don't limit the conversion valuation.
These SAFEs include both a cap and discount, converting at whichever provides more shares to the investor. They're the most investor-friendly but result in more dilution for founders.
These are the most founder-friendly SAFEs, providing only MFN protection. They convert at the Series A price but ensure the investor gets any better terms offered to future SAFE investors.
While both instruments delay equity distribution until a future financing, they differ significantly:
SAFEs typically convert during a "Qualified Financing"—usually defined as raising a minimum amount (often $1-5M) in a priced equity round. The conversion calculation depends on the SAFE terms:
With Cap Only: Conversion Price = Min(Valuation Cap ÷ Company Capitalization, Series A Price)
With Discount Only: Conversion Price = Series A Price × (1 - Discount Rate)
With Both: Conversion occurs at whichever price gives the investor more shares
Founders can't know exact dilution until conversion occurs. Multiple SAFEs with low caps can result in significant unexpected dilution, especially if the company raises at a high valuation.
Upon conversion, SAFE holders typically receive the same liquidation preferences as other preferred shareholders, which can impact founder returns in acquisition scenarios.
While SAFEs themselves don't carry voting rights, they convert to preferred shares that often do, potentially affecting company control.
Unlike convertible notes, SAFEs don't generate returns if the company doesn't raise additional funding or exit, and there's no guaranteed repayment date.
In bankruptcy or dissolution, SAFE holders rank behind all creditors, making them riskier than convertible notes in downside scenarios.
Most SAFEs don't include pro rata rights, meaning investors may not be able to maintain their ownership percentage in future rounds.
The legal costs for SAFE financing are significantly lower than traditional equity rounds:
The investment minimums for SAFEs typically range from $25,000 to $100,000, though some angel investors will invest smaller amounts ($5,000-$25,000) in very early-stage companies.
A B2B software startup raises $500K via SAFE with a $5M cap and 20% discount. When they raise Series A at $15M valuation, SAFE converts at $5M cap, giving investors 3x more shares than Series A price.
A consumer app raises $250K on a $3M cap SAFE. The company struggles and raises a down round Series A at $2M valuation. SAFE converts at Series A price since it's below the cap.
A hardware company raises $1M across multiple SAFEs with $8M cap. Series A values company at $25M, but SAFEs convert at cap, resulting in 40% dilution instead of expected 15%.
SAFEs typically convert in dissolution scenarios based on liquidation proceeds, but investors rank behind all creditors. Some SAFEs include change of control provisions that trigger conversion during acquisitions.
Yes, especially with low valuation caps. Multiple SAFEs with caps below the Series A valuation can create substantial dilution. Founders should model scenarios carefully and consider cap increases for later SAFEs.
SAFEs themselves don't provide board seats or voting rights. However, upon conversion to preferred shares, SAFE holders typically receive the same rights as other preferred shareholders, which may include voting rights.
SAFEs can complicate 409A valuations since they represent future equity claims. 409A providers must consider SAFE conversion scenarios when valuing common stock, often resulting in higher common stock valuations than expected.
While Y Combinator provides standard templates, SAFE terms are negotiable. Common negotiation points include valuation caps, discount rates, MFN provisions, and conversion triggers. However, extensive modifications reduce the simplicity benefit.
Post-money SAFEs (introduced in 2018) fix the investor's ownership percentage at conversion, providing more certainty. Pre-money SAFEs result in dilution from other SAFEs, making the final ownership percentage unpredictable.
If the Series A valuation is below the SAFE cap, the SAFE converts at the Series A price, providing no benefit to the investor. This is why some investors prefer convertible notes with anti-dilution protection.