SAFE agreements

Complete guide to Y Combinator’s Simple Agreement for Future Equity (SAFE), including post-money SAFEs, conversion mechanics, and when to use them

The Simple Agreement for Future Equity (SAFE) is a financing instrument created by Y Combinator in 2013 that revolutionized early-stage startup investing. It’s simpler than convertible notes, with no interest rate, maturity date, or repayment obligation.

SAFEs are not debt. They’re not equity either. They’re a contractual right to receive equity in the future, typically when you raise a priced equity round or have a liquidity event.

Why SAFEs exist

Y Combinator created SAFEs to address problems with convertible notes:

Simplicity

Convertible notes are unnecessarily complex for early-stage rounds:

• Interest rates that must be calculated
• Maturity dates that create artificial pressure
• Debt classification with repayment obligations
• Negotiation over multiple financial terms

SAFEs eliminate this complexity:

• No interest calculation
• No maturity date
• No repayment obligation
• Fewer terms to negotiate

The entire SAFE agreement is typically 5 pages compared to 20+ for a note.

Founder-friendly terms

SAFEs were designed to be fair to founders:

• No debt on your balance sheet
• No pressure from approaching maturity dates
• No requirement to pay interest if you’re profitable
• Simple conversion mechanics

This aligns investors with long-term company success rather than short-term debt repayment.

Speed to close

With fewer terms to negotiate and simpler documents:

• Term sheet discussion takes hours, not days
• Legal review is faster and cheaper
• No complex financial modeling needed
• Closing can happen in days

This matters when you’re trying to get back to building your product.

Industry adoption

Since Y Combinator launched SAFEs:

• Thousands of startups have raised capital via SAFEs
• Most top accelerators use SAFEs as their standard
• Angel investors widely accept them
• Many VCs use SAFEs for pre-seed/seed bridge rounds

SAFEs have become the market standard for very early-stage investing.

SAFE variants

Y Combinator offers four standard SAFE templates, each with different economic terms.

Valuation cap, no discount

Most common SAFE structure

The SAFE converts based on a valuation cap:

• Sets maximum conversion valuation
• No discount on equity round price
• Simple and clean

Example:

• SAFE: $100K investment at$6M cap
• Series Seed: Raises $2M at$8M pre-money, $1.00/share
• SAFE converts at: $6M cap ÷ 8M shares =$0.75/share
• SAFE gets: $100K ÷$0.75 = 133,333 shares

When to use:

• Standard for most pre-seed and seed rounds
• Clean cap table math
• Easy to explain to all parties

This is the most popular SAFE variant. If you’re unsure which to use, start here.

Discount, no cap

Discount-only SAFE

The SAFE converts at a discount to the equity round price:

• Typically 15-20% discount
• No valuation cap
• Rewards early investors with more shares

Example:

• SAFE: $100K investment with 20% discount
• Series Seed: Raises $2M at$1.00/share
• SAFE converts at: $1.00 × 80$0.80/share
• SAFE gets: $100K ÷$0.80 = 125,000 shares

When to use:

• When company valuation is uncertain
• Later-stage SAFEs when valuation is more established
• Bridge financing before a known equity round

Without a cap, SAFE holders have unlimited dilution risk if your valuation increases dramatically. Most investors prefer a cap.

Cap and discount

Belt and suspenders approach

The SAFE converts at the better of:

• Price based on valuation cap, OR
• Discounted equity round price

Example:

• SAFE: $100K at$5M cap with 20% discount
• Series Seed: $10M pre-money at$2.00/share (5M shares)

Option 1 - Cap: $5M cap ÷ 5M shares =$1.00/share

Option 2 - Discount: $2.00 × 80$1.60/share

SAFE converts at $1.00/share (the lower price)

When to use:

• Very early stage with uncertain trajectory
• Investor wants downside protection
• Higher-risk scenarios

Cap + discount SAFEs are more investor-favorable and less common in competitive markets.

MFN, no cap, no discount

Most Favored Nations SAFE

No cap or discount, but:

• If you issue SAFEs with better terms later, this SAFE automatically gets those terms
• Otherwise converts at equity round price (no benefit)

Example:

• Early SAFE: $50K MFN only
• Later SAFE: $200K at$8M cap
• MFN triggers: Early SAFE gets $8M cap too

When to use:

• Very earliest investors (friends/family)
• Rolling closings where terms may improve
• Situations where valuation cap is unknown

Why it’s rare:

• Provides minimal protection to investor
• No guaranteed discount or cap
• Only useful in specific scenarios

MFN-only SAFEs give investors very little economic benefit. They’re essentially betting that you’ll offer better terms to later investors.

Post-money vs. pre-money SAFEs

In 2018, Y Combinator updated their SAFE to use “post-money” valuation mechanics, which are clearer and more founder-friendly.

Pre-money SAFEs (legacy)

How they worked:

• Cap was treated as pre-money valuation
• SAFE holders diluted each other
• Cap table math was confusing
• Could result in unexpected dilution

Example of the problem:

3 SAFEs invest $100K each at $6M cap
Series Seed raises $2M at $10M pre-money

Question: What % does each SAFE get?
Answer: Complicated, and SAFEs dilute each other

Y Combinator deprecated pre-money SAFEs in 2018. Don’t use them.

Post-money SAFEs (current)

How they work:

• Cap represents post-money valuation
• SAFE investors don’t dilute each other
• Crystal clear ownership calculation
• Predictable cap table impact

Simple math:

SAFE invests $1M at $10M post-money cap

Ownership = Investment ÷ Cap
          = $1M ÷ $10M
          = 10% of company (precisely)

This is the SAFE you should use. It’s simpler and more predictable for everyone.

Always use post-money SAFEs. They’re the current standard and eliminate confusion about dilution.

How SAFEs convert

SAFEs convert to equity when specific events occur. Understanding these mechanics is crucial.

Equity financing conversion

1. Equity financing triggers conversion

   When you raise a “Equity Financing” (typically any preferred stock round), all SAFEs automatically convert.

   Qualified as Equity Financing:

   • Sale of preferred stock
   • Principal purpose of raising capital
   • Typically $1M+ minimum threshold (negotiable)

   Not Equity Financing:

   • SAFE conversions themselves
   • Stock option exercises
   • Convertible note conversions
   • Strategic partner stock issuance (usually)
2. Calculate conversion price

   Post-money SAFE math:

   Conversion Price = Post-Money Valuation Cap ÷ Company Capitalization

   Where Company Capitalization includes:

   • All outstanding stock (common and preferred)
   • All outstanding options and promises (converted to common)
   • All convertible securities (SAFEs, notes) as-converted
   • All shares reserved under option pool

   Example:

   • SAFE: $500K at$8M post-money cap
   • At conversion, company has 8M shares outstanding (fully-diluted)
   • Conversion price: $8M ÷ 8M shares =$1.00/share
   • SAFE converts to: $500K ÷$1.00 = 500,000 shares
3. Determine which shares SAFE receives

   Standard SAFE: Converts to same stock as equity round investors

   • If Series Seed Preferred is issued, SAFE gets Series Seed Preferred
   • Same rights, preferences, and privileges
   • Same liquidation preference per share

   Shadow series possible:

   • If SAFE converts at lower price than equity round price
   • Company may issue shadow series (e.g., “Series Seed-1”)
   • Identical rights to Series Seed
   • Different liquidation preference per share (1x the SAFE price)
4. Update cap table

   After SAFE conversion:

   • SAFE holders become stockholders
   • Receive all rights of that stock class
   • Subject to all obligations (drag-along, etc.)
   • SAFEs disappear from cap table

   Model your cap table with SAFEs converting before you price your equity round. You need to understand total dilution.

Liquidity event conversion

Acquisition or IPO

If you’re acquired or IPO before raising an equity round, SAFE holders receive:

Option 1 - Cash payment (most common):

• SAFE converts immediately before transaction
• Converts at valuation cap (or discount if applicable)
• SAFE holder receives cash equal to their pro rata share

Example:

• SAFE: $100K at$10M cap
• Acquisition: Company sells for $50M
• SAFE converts: $100K ÷$10M = 1% of company
• SAFE receives: 1% × $50M =$500K

Option 2 - Stock in acquirer:

• Less common
• SAFE converts to company stock first
• That stock then converts to acquirer stock per deal terms

Dissolution

If the company dissolves or winds down:

Standard SAFE:

• SAFE holders receive any proceeds
• After debt, but before common stockholders
• Pro rata based on purchase amounts
• Treated similar to a liquidation preference

Practical reality:

• Most dissolutions have no proceeds
• SAFE holders typically receive nothing
• SAFEs are high-risk investments

SAFEs are extremely risky if the company fails. They’re subordinate to debt and may receive nothing in a dissolution.

SAFE terms and negotiation

While SAFEs are simpler than notes, you still need to negotiate key terms.

Key negotiable terms

Valuation cap

What it is: Maximum effective valuation for SAFE conversion

Typical ranges by stage:

• Pre-seed: $4M -$8M
• Seed: $8M -$15M
• Bridge to Series A: $15M -$25M

Negotiation dynamics:

• Higher cap = less dilution for founders
• Lower cap = better deal for investors
• Should reflect realistic Series A valuation

Your SAFE cap should be 50-70% of your expected Series A valuation. If you expect to raise Series A at $20M pre-money, a$10-14M SAFE cap is reasonable.

Discount rate

What it is: Percentage discount to equity round price

Standard rates:

• 15-20% most common
• 10-15% for later-stage SAFEs
• 20-25% for very early, high-risk

When to use:

• With a cap: Provides floor and ceiling
• Without a cap: Only protection for investor

If you have both a cap and discount, investors get the better deal between the two at conversion.

Pro rata side letter

What it is: Right to invest pro rata in equity financing

Standard terms:

• Available to investors of $50K-100K+
• Right to maintain ownership percentage
• Granted via separate side letter
• Optional and negotiable

Founder consideration:

• Reduces available allocation in Series A
• May crowd out new investors
• Can be helpful with strategic investors

See Y Combinator’s Pro Rata Side Letter template.

MFN provision

What it is: Right to better terms if offered to future SAFE investors

How it works:

• You issue SAFE A at $10M cap
• Later issue SAFE B at $8M cap
• SAFE A automatically gets $8M cap

Founder impact:

• Limits flexibility in future SAFE terms
• Can’t offer different terms to different investors
• Creates parity but reduces negotiating room

MFN provisions complicate your fundraising. Try to avoid them or limit them to a short time window (e.g., 90 days).

Information and governance rights

Standard Y Combinator SAFEs include minimal investor rights:

Information rights

Standard SAFE: No information rights until conversion

Sometimes negotiated:

• Annual financial statements
• Quarterly updates
• Major event notifications

Founder perspective:

• Adds administrative burden
• Not standard for SAFEs
• Can add via side letter if needed

Most SAFE investors don’t ask for information rights. They’ll get them after conversion.

Board seats

Standard SAFE: No board seat or observer rights

SAFEs don’t convey governance rights. Investors become stockholders only after conversion.

Exception: Very large SAFE investors ($1M+) sometimes negotiate:

• Board observer rights
• Granted via separate side letter
• Continue after conversion

Generally resist board seats or observer rights for SAFE investors. Wait until Series A.

Major decisions

Standard SAFE: SAFE holders don’t vote on company decisions

They’re not stockholders until conversion. Company has full control.

Very rare exception: Some large SAFEs include:

• Consent rights for major decisions
• Blocking rights for new SAFEs
• Approval rights for liquidity events

Giving SAFE holders voting rights defeats the purpose of SAFEs. Avoid this.

SAFEs vs. convertible notes

Choosing between SAFEs and convertible notes depends on your situation.

Choose SAFEs when

✅ Use a SAFE if:

• Very early stage (pre-seed, accelerator)
  • You need simplicity over complexity
  • Valuation is highly uncertain
  • You want to close quickly
• Founder-friendly market
  • Investors accept SAFEs as standard
  • You have leverage in negotiations
  • You’re in a tech hub (SF, NYC, etc.)
• Speed is critical
  • You need to close in days, not weeks
  • Legal fees must be minimal
  • Term sheet negotiations should be brief
• Small amounts
  • Individual checks under $250K
  • Many small investors
  • Rolling closes over time

SAFEs are the default for Y Combinator companies and most accelerator programs. If you’re pre-seed or seed, start with SAFEs.

Choose convertible notes when

✅ Use convertible notes if:

• Later stage bridge round
  • Between Series A and Series B
  • Series A is closing but you need cash now
  • Clear equity round coming within 12 months
• Conservative investors
  • Investors unfamiliar with SAFEs
  • Prefer debt instruments for accounting
  • Want maturity date protection
• International investors
  • Some countries have tax/regulatory issues with SAFEs
  • Debt instruments are better understood
  • Legal frameworks recognize notes better
• Larger amounts
  • Individual checks over $500K
  • Institutional investors involved
  • More diligence and documentation expected

Convertible notes make sense for bridge financings between equity rounds when timing is clear and amounts are substantial.

Key differences

Comparison table:

Feature	SAFE	Convertible Note
Instrument type	Future equity right	Debt
Interest rate	None	2-8% annually
Maturity date	None	12-24 months
Repayment obligation	No	Yes (if not converted)
Document length	5 pages	15-20 pages
Legal fees	$2-5K	$5-15K
Time to close	Days	Weeks
Balance sheet	Not debt	Liability
Complexity	Very simple	Moderate
Market acceptance	Standard for pre-seed/seed	Standard for bridges

Bottom line: SAFEs are simpler and faster. Notes are more traditional and familiar.

Common SAFE pitfalls

Avoid these mistakes when using SAFEs:

Not modeling dilution

The problem:

• Founders issue multiple SAFEs
• Don’t model conversion scenarios
• Surprised by dilution at Series A

Example of the problem:

Founder issues:
- $500K SAFE at $5M cap
- $750K SAFE at $6M cap
- $1M SAFE at $8M cap
Total: $2.25M on SAFEs

Series A: $3M at $12M pre-money

Founder assumption: ~20% dilution from Series A
Reality: ~35% dilution from SAFEs + Series A

The fix:

• Model your cap table after each SAFE
• Assume SAFEs convert at their caps
• Plan for total dilution, not just equity round dilution
• Use tools like Carta or Pulley

Raising too much on SAFEs

The problem:

• SAFEs seem like “free money” (no immediate dilution)
• Founders raise $2M+ on SAFEs before pricing
• Creates complex cap table at Series A

Why it’s bad:

• Series A investors see messy cap table
• SAFEs at multiple caps are confusing
• May require re-negotiating SAFE terms
• Can kill your Series A

General rules:

• Don’t raise more than $1.5M on SAFEs
• Consider pricing an equity round sooner
• Keep number of SAFEs manageable (fewer than 20 investors)

If you need to raise more than $2M, strongly consider pricing an equity round instead of continuing to issue SAFEs.

Inconsistent SAFE terms

The problem:

• Issuing SAFEs with different caps over time
• Some with discounts, some without
• Some with MFN, some without
• Creates cap table mess

Example:

- January: $250K SAFE at $6M cap, 20% discount, MFN
- March: $500K SAFE at $8M cap, no discount, MFN
- May: $300K SAFE at $10M cap, 15% discount, no MFN

MFN triggers make this a nightmare to unwind.

Best practice:

• Set SAFE terms at the beginning
• Use same terms for all investors in that round
• Only change terms for next distinct round
• Document any exceptions clearly

Not getting legal counsel

The problem:

• SAFEs seem simple
• Founders use them without legal review
• Don’t understand conversion mechanics
• Problems emerge at equity round

What can go wrong:

• Invalid securities law exemptions
• Missing required filings (Form D)
• Incorrect investor qualifications
• Improper board approvals
• Securities law violations

The fix:

• Have a lawyer review your first SAFE
• Understand the mechanics thoroughly
• Ensure proper securities law compliance
• Get board approval for each SAFE

While SAFEs are simpler than notes, you still need legal counsel for your first one. Once you understand them, subsequent SAFEs can be faster.

SAFE best practices

1. Use post-money SAFEs exclusively

   Always use Y Combinator’s current post-money SAFE templates. Never use pre-money SAFEs.

   Download from Y Combinator.

2. Start with cap-only SAFEs

   Unless investors specifically request a discount, use the “Valuation Cap, no Discount” SAFE.

   It’s cleaner, simpler, and easier to explain to future investors.

3. Set a realistic valuation cap

   Your cap should be 50-70% of your expected Series A valuation. If you think Series A will be $20M pre-money:

   • SAFE cap range: $10M -$14M
   • Too low: You over-dilute
   • Too high: Investors won’t participate
4. Keep excellent records

   For each SAFE, maintain:

   • Signed SAFE agreement
   • Wire transfer confirmation
   • Board consent approving the SAFE
   • Form D filing (if required)
   • Updated cap table

   Use a service like Carta, Pulley, or Clerky to manage SAFEs.

5. Communicate with SAFE holders

   Even though SAFEs don’t require information rights, keep investors updated:

   • Quarterly email updates
   • Major milestone announcements
   • Heads up before equity financing

   These investors believed in you early - keep them engaged.

6. Plan your equity round

   Before raising your equity round:

   • Model full dilution including all SAFEs
   • Understand how SAFEs will convert
   • Set Series A price that works with SAFE conversion
   • Consider whether you need to adjust option pool

   Surprises at equity financing are bad for everyone.

Resources and templates

Y Combinator SAFE templates

Download all four SAFE variants and the Pro Rata Side Letter template

SAFE User Guide

Y Combinator’s comprehensive guide to post-money SAFEs with examples

Clerky SAFE service

Automated SAFE preparation and filing service for startups

Cap table tools

Model SAFE conversion with:

• Carta
• Pulley
• Capshare

Next steps

Convertible notes

Compare SAFEs to convertible notes and understand when to use each

Equity term sheets

Learn about equity financing and how SAFEs convert in priced rounds

Cap table planning

Understand dilution and plan your cap table through multiple rounds