SAFE
A SAFE — a simple agreement for future equity — is an instrument under which an investor pays a company now and receives shares at the next priced round, at a discount or a valuation cap, with no interest, no maturity and no debt. Introduced by Y Combinator in 2013 and revised to the post-money form in 2018, it is the standard seed instrument in the US because it is five pages long and takes a day to sign.
- Also known as
- Simple Agreement for Future Equity, Post-money SAFE, YC SAFE
- Used at
- pre-seed and seed financing, and small bridges, where a priced round is too slow or too expensive for the amount raised
- Binding
- yes — a short standard agreement; the shares are issued when a priced round, a sale or a listing occurs
- Typical terms
- a post-money valuation cap (the company's value including all SAFEs, at which the investor's percentage is fixed), or a discount of 10–25%, or both; pro-rata rights as a side letter; no interest, no maturity
- Typical arithmetic (post-money SAFE)
- investor's stake = investment ÷ valuation cap, fixed regardless of later SAFEs; conversion price = cap ÷ the fully diluted share count including all SAFEs and the option pool
- Parties
- the company and the SAFE investors; the Series A lead, who sees the SAFEs convert in front of it and prices accordingly
How a SAFE works in practice
An investor puts €300,000 into a company on a post-money SAFE with a €6m cap. Nothing is issued yet; the investor holds a promise. When the company raises a priced round, the SAFE converts into preferred shares at the lower of the cap price and the round price (or the discounted round price, if there is a discount): if the round values the company above €6m, the investor's €300,000 buys 5% of the company as it stood before the round — the percentage the cap fixed — and the round then dilutes everyone alike. If the company is sold before a round, the SAFE holder chooses between its money back and the shares it would have converted into. If the company fails, the SAFE ranks with equity: nothing.
The 2018 post-money form changed the dilution arithmetic. Under the original pre-money SAFE, each new SAFE diluted the earlier ones and the founders together; under the post-money SAFE, each investor's percentage is fixed against a cap that includes all SAFEs, so every new SAFE dilutes the founders alone. Founders raising €2m across ten SAFEs at a €10m post-money cap have sold 20% of the company before the Series A prices it, and a cap table that shows this is the first thing a Series A lead asks for.
Outside the US the SAFE competes with priced seed rounds, which set a valuation and issue shares now, and with the convertible note, which is debt. Fintech founders raising for a licence application, with a year before revenue, use SAFEs because a valuation on a company that cannot yet trade is an argument nobody wins.
Example
A fintech raises €1.5m in seed money on post-money SAFEs at a €10m cap — 15% of the company fixed for the SAFE investors, whatever else is issued before the priced round. It later raises a €5m Series A at a €25m pre-money. The SAFEs convert at the cap: 15% of the pre-round company, diluted by the round's 16.7% (€5m ÷ €30m) to 12.5% post-money — for €1.5m, against the Series A investors' 16.7% for €5m. The founders, who had a 10% option pool before the round, hold about 62% post-money. Had the seed been a priced round at a €10m pre-money, the seed investors would have held 13% before the A and 10.9% after it — less than the SAFEs' 12.5%, because a post-money cap counts the seed money itself inside the €10m. Under the older pre-money SAFE at the same cap, the SAFE investors would have diluted each other as each one signed, and the founders would have kept about two points more. The choice of form was worth €600,000 at the round price.
Common mistakes
- Stacking post-money SAFEs without modelling that each fixes its own percentage and all of the dilution lands on the founders. - A cap set so high the SAFE converts at a discount the investor never intended, or so low that the seed takes a quarter of the company. - Treating a SAFE as "not dilution" because no shares are issued yet. - Side letters with pro-rata or information rights that conflict with the Series A's terms. - Using a SAFE in a jurisdiction whose company law does not recognise it cleanly, and discovering that at the round.