SAFE (Simple Agreement for Future Equity)

How it works

Invented by Y Combinator in 2013, a SAFE (Simple Agreement for Future Equity) is the dominant fundraising instrument at pre-seed and seed in the US. Founders prefer it to a convertible note because it has no maturity date, no interest, and no debt component. SAFEs convert into preferred stock automatically when the company raises a priced round — at either the SAFE's valuation cap or its discount rate, whichever is more favourable to the investor. Modern SAFEs are usually post-money, meaning the cap includes the SAFE itself, making founder dilution transparent.

Worked example

A founder raises $500K on a $10M post-money SAFE cap. When they later raise a Series A at a $30M pre-money valuation, the SAFE converts at the $10M cap — the investor's $500K becomes 5% of the company.

Related terms

• Convertible note
  A convertible note is short-term debt that converts into equity when the company raises a future priced round.
• Valuation cap
  A valuation cap is the maximum valuation at which an early investment (SAFE or convertible note) will convert into equity, protecting the investor from being diluted if the company's valuation skyrockets.
• Post-money valuation
  Post-money valuation is what a company is worth after the new investment is added (pre-money + the amount raised).
• Pre-money valuation
  Pre-money valuation is what a company is worth before the new investment is added — used to calculate how much of the company the new investors are buying.
• Dilution
  Dilution is the reduction in an existing shareholder's ownership percentage that happens when a company issues new shares — typically when raising a new round.