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SAFE (Simple Agreement for Future Equity)

Also known as: SAFE, SAFE note

A simple contract that gives an investor the right to future equity in exchange for cash now, converting to shares at a later priced round.

Fundraising

What it is

A SAFE is a short investment contract, created by Y Combinator in 2013, that lets a startup take cash today in exchange for the right to shares later. It converts into equity at the next priced (usually equity) financing round, not immediately.

Facts

  • A SAFE is not debt: it has no interest rate and no maturity date.
  • Terms are set by a valuation cap and/or a discount (commonly 10% to 25%).
  • The current standard is the post-money SAFE (YC, 2018), which makes dilution easier to calculate.
  • SAFEs stay on the cap table as pending conversions until a priced round triggers them.

Who it's for

Early-stage (pre-seed/seed) founders who want to raise quickly and cheaply before setting a firm valuation.

How it helps you

It lets you close individual investors on a rolling basis without lawyers negotiating a full priced round, so you get money in the bank fast.

Caveats

Stacking many post-money SAFEs at low caps can cause surprising dilution at conversion. Model the fully converted cap table before signing more.

Conclusion

A SAFE is commonly used for early-stage funding and can be faster and less expensive than a priced round, but track every cap and discount so conversion doesn't dilute you more than expected.

How it helps you

The default instrument for raising your first outside money fast, but the caps you agree to today decide how much you own tomorrow.

#fundraising#safe#early-stage#equity#valuation-cap#legal#finance

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