Fundraising

SAFE (Simple Agreement for Future Equity)

Definition

A SAFE is an investment contract, created by Y Combinator in 2013, where an investor gives a startup cash now in exchange for the right to receive equity later, typically when the company raises a priced round, without setting a valuation up front.

A SAFE isn't debt. It doesn't accrue interest and it doesn't have a maturity date the way a convertible note does, which is a big part of why early-stage rounds moved toward it: fewer terms to negotiate, faster to close. What it does carry is a valuation cap and/or a discount rate, and that's what determines the price it converts at once a priced round actually happens.

The part that catches founders off guard later is stacking. Every SAFE outstanding converts at the next priced round, and multiple SAFEs at different caps can add up to more dilution than the founder tracked in their head. Modeling out what a whole stack of SAFEs actually converts to, not just what each one felt like at the time, is the kind of math a cap table has to answer.

How a SAFE converts

A SAFE turns into shares at the next priced round. How many shares depends on its terms:

Valuation cap: the highest valuation the SAFE converts at. If the round prices above the cap, the SAFE holder converts at the cap's lower price and gets more shares.
Discount: a percentage off the round's price, often 10% to 20%.
Both: the holder gets whichever gives the lower price.
MFN (most favored nation): no cap or discount, but the right to take better terms if the company later issues a SAFE with them.

Post-money vs. pre-money SAFEs

Y Combinator introduced the SAFE in 2013 and moved to the post-money SAFE in 2018, which most SAFEs use now. With a post-money cap, the investor's ownership at conversion is easy to read: the investment divided by the cap, before the new round's dilution. The catch for founders is that every additional post-money SAFE dilutes the founders, not the earlier SAFE holders.

What founders track

Every SAFE's amount, cap, discount, and type, in one place, as you sign them
The combined ownership all your SAFEs will take at conversion, not each one alone
Side letters, such as pro rata rights, that come with some SAFEs
How the SAFEs and the new option pool together hit founder ownership in the priced round

Worked example: a $500,000 post-money SAFE

Terms: $500,000 on a $5 million post-money valuation cap
Ownership at conversion: $500,000 / $5 million = 10%, before the priced round's own dilution
Three of them: Three $500,000 SAFEs at the same cap take about 30% together, all of it from the founders' side
With a discount instead: A 20% discount on a $2.00 Series A share price converts at $1.60 a share

Simplified. Exact share counts depend on the SAFE form and the round's terms; model the whole stack before the round.

10%

What a $500,000 SAFE on a $5 million post-money cap converts to. Add up yours before the round.

Model your SAFE stack →

Questions founders ask

Is a SAFE debt or equity?

Neither, technically. It's a contract for future equity: no interest, no maturity date, and no repayment obligation like a convertible note has. It converts into shares at the next priced round.

What's the difference between a valuation cap and a discount?

A cap sets the highest valuation the SAFE converts at; a discount gives a percentage off the new round's price. When a SAFE has both, the investor gets whichever results in the lower price per share.

How much of the company does a post-money SAFE take?

Roughly the investment divided by the post-money cap: $500,000 on a $5 million cap is 10%, before the new round dilutes everyone.

What happens to a SAFE if the company is acquired before a priced round?

Standard YC SAFEs give the holder a choice in a sale: get their money back or convert at the cap and share in the proceeds, whichever is more. The exact terms depend on the SAFE form signed.

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