What is a SAFE agreement?

A SAFE (Simple Agreement for Future Equity) is a financing contract where an investor gives a startup money now in exchange for the right to receive shares later, usually when the company raises a priced equity round. It is not a loan and not stock at signing: it converts into equity once a triggering event happens. Y Combinator introduced the SAFE in 2013 to make early fundraising faster and cheaper than convertible notes.

What is the difference between a SAFE and a convertible note?

Both let a startup raise money before setting a formal valuation, but a convertible note is debt: it carries an interest rate and a maturity date, and the company technically owes the money back if it never converts. A SAFE has no interest, no maturity date, and no repayment obligation. That makes SAFEs simpler and friendlier to founders, though investors sometimes prefer notes because the maturity date creates pressure to raise a priced round.

What is a valuation cap and a discount in a SAFE?

A valuation cap sets the maximum company valuation used to calculate how many shares the investor gets when the SAFE converts, rewarding early risk with a better price. A discount gives the investor a percentage off the price per share paid by new investors in the priced round (commonly 10 to 25 percent). A SAFE can have a cap, a discount, both, or neither. When both apply, the investor gets whichever produces more shares.

Does a SAFE give the investor equity right away?

No. At signing the investor holds only a contractual right to future shares. The SAFE converts into actual equity when a triggering event occurs, typically a priced equity financing, a sale of the company, or sometimes a dissolution. Until then the investor has no voting rights, no board seat, and is not a shareholder of record.

Are SAFEs good for founders?

SAFEs are fast, cheap to issue, and avoid the debt mechanics of convertible notes, which makes them popular for pre-seed and seed rounds. The main risk is dilution: founders who issue several SAFEs with different caps often underestimate how much equity they have given away until conversion. Tracking every SAFE on a pro forma cap table before signing the next one is the way to avoid an unpleasant surprise.

SAFE Agreement Template: A Founder's Guide

Learn how to write a SAFE agreement. Covers valuation caps, discount rates, post-money vs. pre-money SAFEs, MFN terms, and the mistakes that dilute founders.

A SAFE (Simple Agreement for Future Equity) has become the default way early-stage startups raise their first outside money. It lets a founder take a check today and hand over equity later, without negotiating a valuation, drafting a stock purchase agreement, or setting up the debt machinery of a convertible note.

That simplicity is also where founders get into trouble. A SAFE is short, but the few numbers it contains decide how much of your company you eventually give away. Below we cover what a SAFE actually is, how the conversion math works, which clauses matter, and the mistakes that quietly cost founders far more equity than they expected.

What is a SAFE?

A SAFE is a contract between a startup and an investor. The investor pays money now in exchange for the right to receive shares in the future, usually when the company closes a priced equity round (often the Series A). It is not stock at the moment of signing, and it is not a loan.

Y Combinator created the SAFE in 2013 as a replacement for the convertible note. The goal was to strip out the parts of early fundraising that generated legal fees and slowed deals down: interest calculations, maturity dates, and the question of what happens if the company never raises again. A SAFE drops all of that. The investor wires the money, both sides sign a few pages, and the conversion terms sit dormant until a triggering event wakes them up.

Because there is no maturity date and no interest, a SAFE never has to be repaid. If the company succeeds and raises a priced round, the SAFE converts into shares. If the company fails, the investor loses the money, the same as any equity investor.

SAFE vs. Convertible Note

The two instruments solve the same problem, raising money before you have a valuation, but they work differently.

Convertible note: Legally a loan. It carries an interest rate (typically 2 to 8 percent) and a maturity date (often 18 to 24 months). If the company has not raised a priced round by maturity, the note technically comes due, which can force an awkward conversation or an extension.
SAFE: Not a loan. No interest, no maturity date, no repayment obligation. It converts only when a triggering event happens, and it can sit on the cap table indefinitely until then.

Founders generally prefer SAFEs because they remove the debt overhang. Some investors still prefer notes precisely because the maturity date gives them leverage and the interest accrues more shares over time. For a fuller picture of how early-stage terms get negotiated, see our guide to creating an investor agreement for early-stage funding.

How a SAFE Converts: Caps and Discounts

The whole point of a SAFE is rewarding an investor for taking early risk. Two mechanisms do that: the valuation cap and the discount.

Valuation cap

The valuation cap is the maximum company valuation used to price the investor's shares when the SAFE converts, regardless of the actual valuation in the priced round.

Say an investor puts in $100,000 on a SAFE with a $5 million cap. If the Series A values the company at $10 million, the investor still converts as if the company were worth $5 million. Their money buys twice as many shares as a new investor's would, because they took the risk a year earlier.

Discount

The discount gives the SAFE investor a percentage off the price per share paid by new money in the priced round. A 20 percent discount means the investor pays 80 cents for every dollar of stock the Series A investors pay full price for.

Cap, discount, or both

A SAFE can carry a cap only, a discount only, both, or (rarely) neither. When a SAFE has both, the investor converts at whichever term produces more shares, the cap or the discount, never both stacked together. A SAFE with no cap and no discount is unusual and heavily favors the company, so most investors will push back on it.

Here is how the "whichever is better" rule plays out. Say an investor holds a SAFE with a $5 million cap and a 20 percent discount, and the company raises a Series A at a $20 million valuation. Under the cap, the investor prices their shares as if the company were worth $5 million. Under the discount, they pay 80 percent of the $20 million price. The cap is far more generous here, so the cap wins and the discount is ignored. Now flip it: if the Series A came in at only $5.5 million, the cap and the discount land close together, and the discount might produce the better price. The investor automatically gets the better of the two.

Post-Money vs. Pre-Money SAFEs

This is the distinction that trips up the most founders. Y Combinator released a revised "post-money" SAFE in 2018, and it behaves very differently from the original "pre-money" version.

Pre-money SAFE (pre-2018): The valuation cap referred to the company's value before the new investment came in. Calculating each SAFE holder's ownership was messy because multiple SAFEs diluted each other in ways that were hard to predict.
Post-money SAFE (current standard): The cap refers to the company's value including all the SAFE money raised but before the new priced round. Its big advantage is clarity: a post-money SAFE lets the investor calculate their exact ownership percentage the moment they sign.

That clarity has a flip side for founders. With a post-money SAFE, the dilution from the SAFEs falls entirely on the founders and earlier shareholders, not on the new SAFE investors. Stack several post-money SAFEs and you can give away a much larger slice of the company than you intended. Always model the conversion on a pro forma cap table before you sign.

Key Clauses in a SAFE

Even a "simple" agreement has a handful of terms that decide everything.

1. The investment amount and the cap/discount

The purchase amount, the valuation cap, and the discount rate are the economic core. Get these wrong and nothing else matters.

2. Triggering events

A SAFE defines what causes conversion. The standard triggers are:

Equity financing: A priced round (the most common trigger). The SAFE converts into the same class of shares, or a "shadow" series, at the cap or discount.
Liquidity event: A sale, merger, or IPO before any priced round. The investor usually chooses between getting their money back or converting to common stock at the cap.
Dissolution: If the company winds down, the SAFE holder is paid back after creditors but typically before common stockholders, to the extent any money is left.

3. Pro rata rights

Some SAFEs grant the investor the right to invest again in the priced round to maintain their ownership percentage. Y Combinator moved this into a separate side letter, so check whether your version includes it.

4. Most Favored Nation (MFN) clause

An MFN clause lets the investor adopt better terms if the company later issues a SAFE with more favorable terms to someone else. It protects early investors from being undercut by a later, cheaper deal.

5. Information rights

Standard SAFEs give the investor almost no ongoing rights before conversion: no board seat, no vote, and often no obligation for the company to share financials. Larger investors sometimes negotiate a side letter granting annual financial statements or major-event notices. If you grant information rights, define them narrowly so you are not sending detailed reports to a dozen small check-writers every quarter.

6. Definitions

The SAFE leans heavily on defined terms like "Capitalization," "Conversion Price," and "Liquidity Event." These definitions do real work in the math. Read them rather than assuming they mean what they sound like.

How to Write a SAFE: Step-by-Step

Step 1: Identify the parties. Use the company's full legal name and state of incorporation, plus the investor's legal name. SAFEs assume a C-corporation, usually a Delaware C-corp, so confirm your entity type first.

Step 2: Choose the SAFE type. Decide on cap only, discount only, cap and discount, or MFN. Use the current post-money form unless you have a specific reason not to.

Step 3: Set the economic terms. Fill in the purchase amount, the valuation cap, and the discount rate. These are the negotiated numbers; everything else is usually standard.

Step 4: Confirm the triggering events. Make sure the equity financing, liquidity, and dissolution provisions match what you and the investor expect.

Step 5: Decide on side letters. Pro rata rights, information rights, or MFN terms often live in a separate side letter. Address them explicitly rather than leaving them ambiguous.

Step 6: Model the dilution. Before signing, run the conversion on a pro forma cap table. See exactly how many shares this SAFE, plus every SAFE before it, produces at a realistic Series A valuation.

Step 7: Sign and track. Both sides sign. Then log the SAFE on your cap table immediately. An untracked SAFE is the single most common cause of a nasty surprise at the next round.

Common Mistakes Founders Make

Issuing SAFEs without tracking cumulative dilution. Each SAFE looks small on its own. Five of them at different caps can convert into 25 to 30 percent of the company. Founders who do not maintain a running pro forma cap table routinely discover this too late.

Confusing pre-money and post-money caps. The same cap number means very different ownership depending on the SAFE version. Signing a post-money SAFE while thinking in pre-money terms understates how much you are giving away.

Setting the cap too low to close fast. A low valuation cap closes the round quickly because investors love it, but it converts into a large equity stake. Speed today can mean a crowded cap table tomorrow.

Ignoring the MFN clause. If an early investor has MFN rights and you later offer better terms, the early investor can pull those terms too. Issue your most generous terms last, not first.

Treating the SAFE as final on its own. A SAFE governs one investment. The relationships among founders and the eventual shareholders still need their own documents. Pair your fundraising with a solid founders agreement and, once you have priced shares, a shareholder agreement.

When to Use a SAFE

Pre-seed and seed rounds where setting a formal valuation is premature
Raising from angels or an accelerator that already works in SAFEs (most do)
Bridge funding between priced rounds when you want to move quickly
Rolling closes where investors commit at different times and you do not want to renegotiate each one

A SAFE is usually the wrong tool once you are large enough to justify a priced round with a real valuation. At that point a stock purchase agreement and a negotiated term sheet give both sides clearer rights than a stack of converting instruments.

Related guides

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