Understanding a SAFE

A SAFE (Simple Agreement for Future Equity) is an agreement to invest cash in a company today in exchange for the right to receive equity later, typically when the company raises its next priced financing round.

Introduced by Y Combinator in 2013, the SAFE has become a common way to fund early-stage companies. It is not a loan: there is no interest, no maturity date, and nothing to repay. Instead, the investor's money converts into shares at a future event, usually on terms more favorable than what later investors receive.

Why founders often choose a SAFE

Many founders raise on SAFEs rather than running a priced equity round, especially at the earliest stages. The appeal comes down to speed, cost, and flexibility:

• No valuation required today. A priced round forces the company and investors to agree on a valuation up front, which is hard and often contentious when a company is young. A SAFE defers that negotiation to the next priced round, when there is more information to price it fairly.
• Faster and cheaper to close. A SAFE is a short, standardized document with minimal legal work, so a founder can often close in days for a few hundred dollars, versus the weeks and significant legal fees a priced round typically requires.
• Raise on a rolling basis. Founders can sign SAFEs with investors one at a time as commitments come in, rather than coordinating everyone into a single simultaneous close.
• Less structure and dilution to negotiate now. Priced rounds usually add board seats, protective provisions, and other investor rights. A SAFE keeps terms light and postpones that complexity until the company is larger.

The trade-off is that a SAFE delays setting an actual share price and can make the eventual dilution harder to see in advance, which is why the discount and cap terms below matter so much.

The two levers: discount and cap

Almost all of a SAFE's economics come down to two terms. A SAFE may carry one, the other, or both. When it carries both, the investor converts at whichever gives them the lower price.

How it works, step by step

Triggering events

• Equity financing. The company raises a priced round. The SAFE converts into shares of that round. This is the typical outcome.
• Liquidity event. The company is acquired or goes public before a priced round. The investor generally chooses the greater of their money back or their as-converted equity value.
• Dissolution. If the company winds down, the investor is entitled to their investment back to the extent funds are available, ahead of common stockholders.

For the examples below, assume an investor puts in $100,000, and the company has 10,000,000 shares outstanding just before a priced round.

The 20% discount in action

The discount applies to whatever price new investors pay:

The valuation cap in action

Now assume instead an $8,000,000 valuation cap and no discount. On 10,000,000 shares, that fixes the SAFE's conversion price at a maximum of:

The contrast with the discount is the key lesson: a discount lowers the conversion price relative to what new investors pay whenever the SAFE converts in a priced round, while a cap only creates an advantage once the company's valuation has risen above the cap. When it does, the cap's benefit can be far larger.

Discount and cap together: the better of the two

Most real SAFEs carry both a discount and a cap. At conversion the investor gets the more favorable (lower) price of the two calculations. Keeping the 20% discount and the $0.80 cap price: