SAFE 101: A Founder’s Guide to Simple Agreements for Future Equity
When raising early-stage capital, startup founders have several financing options to consider. The most popular instrument right now is the Simple Agreement for Future Equity, or SAFE. Originally introduced by Y Combinator in 2013, the SAFE has become a standard tool for raising pre-seed and seed capital.
This guide will walk you through what a SAFE is, its common terms, how it converts, and the benefits and drawbacks of using one for your startup.
What Is a SAFE?
A SAFE is a financing instrument that allows startups to raise money from investors in exchange for a future equity stake in the company. Unlike traditional convertible notes, SAFEs are not debt instruments—they do not accrue interest or have a maturity date. Instead, investors receive equity at a later funding round when certain conversion triggers are met.
Common SAFE Terms
SAFEs are typically structured using one or more of the following terms:
Valuation Cap: The maximum valuation at which the SAFE will convert into equity, ensuring early investors receive a discount if the company grows significantly before the next priced round.
Discount Rate: A percentage discount applied to the price per share when converting into equity, providing an incentive for early investors.
Most Favored Nation (MFN) Clause: If the startup later issues SAFEs with better terms, existing SAFE holders can elect to adopt the improved terms.
Pro Rata Rights: The right for SAFE investors to participate in future funding rounds to maintain their ownership percentage.
How a SAFE Converts
SAFEs convert into equity during a “triggering event,” typically the next priced equity round (Series A or later). When this event occurs, the SAFE investment converts into preferred shares at the valuation cap or discounted price, whichever is more favorable to the investor.
For example, if a startup raises a SAFE round with a $5M valuation cap and later raises a Series A at a $10M valuation, SAFE investors will convert into equity as if the valuation were $5M, effectively receiving twice the number of shares compared to Series A investors.
Benefits of Using a SAFE
Founder-Friendly: SAFEs avoid debt-related risks like repayment obligations and maturity deadlines.
Simple and Fast: The standardized nature of SAFEs reduces legal complexity, allowing for quicker fundraising.
Flexible Fundraising: Startups can issue SAFEs on a rolling basis rather than raising a single round at one time.
Drawbacks of Using a SAFE
Uncertain Dilution: Because the conversion happens later, founders may underestimate how much equity they give away.
Investor Concerns: Some investors prefer priced rounds that provide immediate ownership and board influence.
Conversion Timing Risk: If a startup never raises a priced round, SAFE investors may never receive equity.
Is a SAFE Right for Your Startup?
SAFEs are a powerful tool for early-stage fundraising, but they are not a one-size-fits-all solution. If your startup expects to raise a priced round in the near future and you want a fast, founder-friendly way to secure funding, SAFEs may be an excellent option. However, if you are concerned about dilution uncertainty or investor expectations, exploring alternative financing structures like convertible notes or priced rounds may be worth considering.
By understanding how SAFEs work, their terms, and their potential impact on your startup’s future, you can make an informed decision that aligns with your company’s growth strategy.