Simple agreement for future equity
sayf
A simple investment instrument created by Y Combinator that converts to equity at the next priced funding round.
A SAFE is an investment agreement where the investor gives money now and receives equity later, when the company raises a priced round. Created by Y Combinator in 2013, SAFEs have become the standard instrument for pre-seed and seed fundraising.
A SAFE has one or two key terms: a valuation cap (the maximum price at which the SAFE converts) and optionally a discount (a percentage reduction from the next round's price). The most common version is a post-money SAFE with a valuation cap and no discount.
SAFEs are not debt. There is no interest rate, no maturity date, and no obligation to repay. If the company never raises a priced round, the SAFE never converts. This simplicity makes SAFEs fast to execute (a few pages, no negotiation of complex terms) and inexpensive (minimal legal fees). Compare this to convertible notes, which are legally debt.
Examples
A startup raises on SAFEs from multiple angels.
The founder raises $750K from 6 angel investors, each on a post-money SAFE with a $6M valuation cap. Each investor's ownership at conversion is known immediately: if they invested $125K, they will own roughly 2.1% ($125K / $6M) when the SAFE converts.
SAFEs convert at a priced round.
The company raised $1M on SAFEs with a $8M post-money cap. At the Series A, the pre-money valuation is $20M. The SAFEs convert at the $8M cap, giving SAFE holders shares at a much lower price than Series A investors. The SAFE holders' early risk is rewarded.
A company stacks SAFEs between rounds.
After the seed round, the company raises an additional $500K on SAFEs at a $15M cap to extend runway before Series A. These SAFEs will convert at the Series A along with the original seed SAFEs, each at their respective cap.
Frequently asked questions
What is the difference between pre-money and post-money SAFEs?
Pre-money SAFEs: the cap represents the company's value before the SAFE investment. Multiple SAFEs dilute each other, making ownership calculations complex. Post-money SAFEs: the cap includes all SAFE investments. Each investor knows their exact ownership percentage. Post-money SAFEs are now the Y Combinator standard.
What happens if the company is acquired before the SAFE converts?
Most SAFEs include a provision for acquisition. The SAFE holder typically receives either their money back or the amount they would receive if the SAFE converted at the cap, whichever is greater. The exact terms depend on the SAFE version.
Related terms
A form of short-term debt that converts into equity at the next priced funding round, often used in early-stage fundraising.
The estimated worth of a company, determined during a funding round by negotiation between founders and investors.
The first significant round of funding for a startup, typically raising $1-5M to validate the product and find initial customers.
A high-net-worth individual who invests their personal money in early-stage startups in exchange for equity.
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