What is a SAFE?
The Simple Agreement for Future Equity (SAFE) is a financing instrument created by Y Combinator in 2013 that allows startups to raise capital quickly and simply without determining a valuation at the time of investment.The current version is the “post-money SAFE” (2018), which provides clarity on ownership percentages at conversion. This replaced the original “pre-money SAFE” from 2013.
Key Characteristics
A SAFE has several defining features that distinguish it from traditional financing instruments:Not Debt
No interest rate, no maturity date, no repayment obligation
Not Equity
Doesn’t grant ownership until a future conversion event
Simple
Typically 5-10 pages vs. 30+ for convertible notes
Fast
Can be executed in days rather than weeks
How SAFEs Work
Conversion Event
SAFE converts to equity when:
- Company raises a priced equity round (most common)
- Company is acquired or undergoes a change of control
- IPO (rare for SAFE holders)
The Four SAFE Variants
Y Combinator provides four different SAFE templates to accommodate different deal structures. Choose the variant that matches your agreement with investors.- Valuation Cap (No Discount)
- Discount Only
- Cap and Discount
- MFN Only
SAFE: Valuation Cap, no Discount
Most Common Variant - Used in approximately 80% of SAFE financings.Key Terms
- Valuation Cap: Sets maximum valuation for conversion
- No Discount: Converts at same price as new investors (subject to cap)
How It Works
When the company raises a priced round:- Calculate conversion price at valuation cap
- Calculate conversion price at round valuation
- SAFE converts at the lower price (better for investor)
Example
When to Use
Use when you want upside protection for early investors without complexity of discount rates
Download
Post-Money vs. Pre-Money SAFEs
In 2018, Y Combinator updated the SAFE from “pre-money” to “post-money” to provide clarity on dilution.Key Difference Explained
Key Difference Explained
Post-Money SAFE (Current)
- Valuation cap refers to post-money valuation (after SAFE investment)
- Makes it easy to calculate exact ownership percentage
- Formula: Investment ÷ Post-Money Cap = Ownership %
- Valuation cap referred to pre-money valuation (before SAFE investment)
- Created ambiguity about final ownership percentages
- Could lead to unexpected dilution
Optional: Pro Rata Side Letter
Y Combinator also provides a Pro Rata Side Letter that gives SAFE holders the right to participate in future financing rounds to maintain their ownership percentage.Key Terms
- Grants right (not obligation) to invest in future rounds
- Typically used for larger SAFE investments ($100K+)
- Separate document attached to main SAFE
Download
Choosing the Right SAFE
For Most Deals
Valuation Cap, No DiscountBalances founder and investor interests. Standard market terms.
For Confident Investors
MFN OnlyShows strong founder support. Minimal immediate dilution.
For Uncertain Valuations
Discount OnlyGood when company has traction but valuation is unclear.
For High-Risk Early Bets
Cap and DiscountMaximum investor protection. Use for very first investors only.
Common Terms & Definitions
Valuation Cap
Valuation Cap
The maximum effective valuation at which the SAFE will convert to equity. If the company’s actual valuation at the next round exceeds the cap, the SAFE holder converts as if the company were valued at the cap.
Discount Rate
Discount Rate
A percentage discount (typically 15-20%) that SAFE holders receive on the price per share paid by new investors in the next equity round.
Conversion Event
Conversion Event
A triggering event that causes the SAFE to convert into equity, typically:
- Equity Financing (priced round above threshold)
- Liquidity Event (acquisition, merger)
- IPO (rare)
Post-Money Valuation Cap
Post-Money Valuation Cap
The valuation of the company AFTER accounting for the SAFE investment. This is the key feature of the 2018 SAFE update, providing clarity on ownership percentages.
Most Favored Nation (MFN)
Most Favored Nation (MFN)
A clause allowing the SAFE holder to adopt the terms of any future SAFEs with more favorable terms issued before an equity financing.
Advantages of SAFEs
Speed
Can close in days instead of weeks. Minimal negotiation required.
Simplicity
5-10 pages vs. 30+ for convertible notes. Easy to understand.
Flexibility
No maturity date or interest. No pressure to raise next round quickly.
Founder-Friendly
No debt burden. Post-money structure provides clarity.
Potential Drawbacks
Best Practices
Keep It Simple
Use one SAFE variant for all investors in a given round. Multiple variants create complexity.
Track Your Cap Table
Model out how SAFEs will convert under different scenarios. Understand dilution impact.
Set Appropriate Caps
Valuation caps should reflect your current stage and traction. Too low = excessive dilution.
Consult Legal Counsel
Always have a startup attorney review SAFEs before execution, even though they’re standardized.
Resources & Downloads
Official Y Combinator Resources
Official Documents Page
Download all four SAFE variants
Post Money SAFE User Guide
Comprehensive 20-page guide to SAFEs
SAFE Primer
Quick introduction to SAFE concepts
OpenLaw SAFE Template
Automated online SAFE generation
Document Templates
All documents are available as Microsoft Word (.docx) files:- SAFE: Valuation Cap, no Discount
- SAFE: Discount, no Valuation Cap
- SAFE: Valuation Cap and Discount
- SAFE: MFN, no Valuation Cap, no Discount
- Pro Rata Side Letter
All SAFE documents are provided under an open-source license. However, they should be reviewed by legal counsel before use.
Related Topics
- Y Combinator Overview - Learn about all YC legal documents
- Series AA Documents - Equity financing alternative to SAFEs
- Convertible Notes - Traditional alternative to SAFEs