What Is a SAFE (Simple Agreement for Future Equity)?

A SAFE, short for Simple Agreement for Future Equity, is a contract in which an investor pays a startup money today in exchange for the right to receive shares later, usually when the company sells stock in a priced round. The SEC describes it as "an agreement between a company and an investor in which the company promises to give the investor a future ownership interest in the company if certain triggering events occur".

A SAFE isn't a loan and it isn't stock. The investor holds no shares until a trigger event happens, and the company owes no repayment. That makes it popular for very early funding, when putting a price on the company is mostly guesswork and founders would rather close quickly than negotiate a valuation.

Where the SAFE Came From

Y Combinator's documents page says the SAFE was "created at Y Combinator by Carolynn Levy in 2013" and reports that it has been used to raise more than $15 billion for YC portfolio companies. The goal was a standard, short document that replaced the heavier negotiation around convertible notes.

The first SAFEs were "pre-money" instruments. In September 2018 Y Combinator announced a new standard deal built on a post-money SAFE, and its documents page says YC "standardized on the post-money SAFE in 2018."

Why the Switch to Post-Money

The change was about ownership clarity. With a pre-money SAFE, working out how much of the company you'd sold meant accounting for every other SAFE and for a future option pool increase that wouldn't be negotiated until years later. YC's announcement describes those calculations as a recursive loop that founders struggled to track.

With a post-money SAFE, the cap includes the SAFE money itself, so the math collapses into division. YC's own examples: a $500,000 SAFE at a $10 million post-money cap means the founder has sold 5 percent of the company, and adding $1 million at a $16 million post-money cap sells another 6.25 percent, for 11.25 percent in total. As YC's Michael Seibel puts it in the announcement, "you can't optimize what you can't measure."

The trade-off is that the founder, not the investor, now absorbs the dilution from later SAFEs and from SAFE conversion. For a refresher on the difference, see pre-money vs post-money valuation.

The Main SAFE Variants

YC's documents page lists three main versions, defined by how the SAFE sets its conversion price.

YC defines the cap as "the highest valuation at which a SAFE converts into shares" and the discount as one that "rewards early investors with a lower price than your startup's next priced round." A SAFE can combine a cap and a discount, in which case the investor generally gets whichever produces the lower price. Read the document you’re actually signing, since drafting varies.

What Happens at Conversion

YC's page says that when a company sells preferred stock in an equity financing, the outstanding SAFEs "will convert into shares of preferred stock", and that this conversion is automatic and ends the SAFE. The investor's price per share is the lower of the cap price and the discount price, so the SAFE almost always buys shares cheaper than the new investors pay.

A hypothetical worked example

The numbers below are our own round-number illustration of a post-money cap, not real deal data, and the arithmetic is simplified (it ignores a new option pool and any discount).

Setup:

• A startup has 9,000,000 shares outstanding, held by founders and the existing option pool.
• An investor puts $1,000,000 into a SAFE with a $10,000,000 post-money valuation cap.
• Later, the company raises $5,000,000 in a priced Series A at a $20,000,000 pre-money valuation.

Step 1: How many shares does the SAFE become? A $1M investment at a $10M post-money cap is 10 percent of the company's capitalization, SAFE included. So the other 9,000,000 shares must equal 90 percent. The SAFE converts into 9,000,000 / 0.9 x 0.1 = 1,000,000 shares, for a cap price of $1,000,000 / 1,000,000 = $1.00 per share. Check: 10,000,000 shares x $1.00 = $10,000,000, the cap.

Step 2: What price do Series A investors pay? $20,000,000 / 10,000,000 shares = $2.00 per share. The cap price ($1.00) beats the round price, so the SAFE converts at the cap.

Step 3: Who owns what after the round? New investors buy $5,000,000 / $2.00 = 2,500,000 shares. Total shares are 12,500,000.

The SAFE investor paid $1.00 per share for stock the new investors bought at $2.00, so the $1,000,000 is now worth $2,000,000 at the round price. The ten percent they were promised at the cap becomes 8 percent after the new round dilutes everyone, which is how equity dilution works. Model scenarios like this on a cap table before signing.

SAFE vs Convertible Note

Both instruments postpone the pricing question, and both usually convert in the next priced round. The legal nature is what differs. YC's comparison page says a SAFE has no interest or maturity date and that, in a liquidation, it ranks junior to debt and on par with preferred stock, while a convertible note's debt is repaid first.

The practical effect is that a note puts a clock on the company and a SAFE doesn't. That's attractive for founders with limited runway, but it cuts both ways: an investor in a SAFE has no due date to rely on either.

What the SEC Warns Investors About

The SAFE was built for venture investors backing fast-growing startups, and the SEC has cautioned that it may not suit everyone. In its May 2017 Investor Bulletin on SAFEs in crowdfunding, the SEC's Office of Investor Education and Advocacy says that "despite its name, a SAFE may not be 'simple' or 'safe.'" Its main warnings:

• No ownership stake yet. A SAFE isn't common stock. The investor gets a future equity stake only if a triggering event occurs, and holds no voting rights like a shareholder's.
• The trigger may never happen. If a company becomes profitable and never raises another round or gets acquired, the SAFE may never convert. The bulletin also notes that a SAFE tied to a preferred stock offering won't convert if the company raises money by selling more SAFEs, common stock or convertible notes, or by taking a bank loan.
• Terms vary. The bulletin says "there is nothing standard or simple about a SAFE" in the crowdfunding context, and tells investors to check conversion terms, repurchase rights, dissolution rights and voting rights.
• Different from a note. Convertible notes, the SEC says, generally represent a current legal obligation of the company for the outstanding amount, which a SAFE doesn't.

The bulletin was aimed at retail crowdfunding investors. Venture investors buying a standard YC SAFE are in a different position, but the structural points hold for everyone. This article describes common US practice and is general education, not legal or investment advice.

Common Mistakes

• Stacking SAFEs without tracking them. Several SAFEs at different caps convert together, so add them all to one cap table scenario.
• Confusing pre-money and post-money SAFEs. The same dollar cap dilutes founders differently under each.
• Assuming a SAFE is free money. It converts into a real ownership claim. A low cap is expensive if the company does well.
• Ignoring what triggers conversion. Read what counts as an equity financing, and what happens in a sale or shutdown.

Key Facts

• A SAFE is an agreement for future equity, not debt: no interest, no maturity date (Y Combinator).
• It was created at Y Combinator by Carolynn Levy in 2013, and YC standardized on the post-money version in 2018 (Y Combinator).
• A $500,000 SAFE at a $10 million post-money cap sells 5 percent of the company (YC announcement, September 2018).
• The three main variants are valuation cap, discount and MFN (Y Combinator).
• SAFEs convert automatically into preferred stock in an equity financing (Y Combinator).
• The SEC warned in May 2017 that a SAFE may not be "simple" or "safe," and may never convert (SEC Investor Bulletin).

Related Reading

• Convertible Note
• Seed Round
• Pre-Money vs Post-Money Valuation
• Equity Dilution
• Cap Table