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.