SAFE (Simple Agreement for Future Equity)

Quick Definition

An investment agreement that converts to equity in a future funding round, featuring a valuation cap and/or discount without debt terms.

What is a SAFE?

A SAFE (Simple Agreement for Future Equity) is an investment instrument that converts to equity in a future priced round. Created by Y Combinator, it's simpler than convertible notes with no interest, maturity date, or debt component.

SAFEs let startups raise money quickly without negotiating complex terms or determining valuation immediately. The valuation is set when the next priced round occurs.

Key SAFE Terms

• Valuation Cap: The maximum valuation at which the SAFE converts. Protects early investors from excessive dilution.
• Discount: A percentage reduction from the Series A price. Rewards early risk-taking.
• Most Favored Nation (MFN): Guarantees the investor gets terms at least as good as later SAFEs.

Post-Money vs Pre-Money SAFEs

Post-money SAFEs (the current YC standard) make dilution calculations cleaner. The cap represents post-money valuation, so investors know exactly what percentage they'll own upon conversion.

SAFE Considerations

SAFEs are founder-friendly but can create cap table complexity. Multiple SAFEs with different terms convert at different prices. Model your cap table carefully before raising on SAFEs.

Formula

• Conversion Shares = Investment Amount ÷ Conversion Price
• Conversion Price = Lower of (Valuation Cap ÷ Fully Diluted Shares) or (Price Per Share × Discount)

Example

You raise $500K on a SAFE with:

• Valuation cap: $5M post-money
• No discount

At Series A ($10M pre, $2M raise):

SAFE converts at $5M cap (lower than $10M)

SAFE investor gets: $500K ÷ $5M = 10%

Series A investor gets: $2M ÷ $12M = 16.7%

The cap protected the SAFE investor from dilution.

Related Terms

• [Convertible Note]: A debt instrument that converts to equity in a future funding round, featuring interest accrual and a maturity date.
• [Valuation Cap]: The maximum valuation at which a SAFE or convertible note converts to equity, protecting early investors from excessive dilution.
• [Discount Rate (SAFE/Note)]: A percentage reduction on the next round's share price for SAFE or convertible note holders, rewarding early risk.