SAFE

SAFE (Simple Agreement for Future Equity) is a financing contract in which an investor gives a startup money now in exchange for the right to receive equity later, usually when the company raises a priced round. A SAFE is not a loan. It carries no interest rate and no maturity date.

Founders like SAFEs because they are fast, short, and inexpensive to close. There is no repayment date to manage and no debt on the books.

How a SAFE works

The economics live in a few key terms. A valuation cap sets the maximum company valuation used to convert the SAFE into shares, which protects the early investor if the next round prices high. A discount gives the investor a percentage reduction off the next round’s price. A most-favored-nation provision lets the investor claim better terms if the company later issues a SAFE on more favorable terms. These terms decide how much of the cap table the SAFE holder ends up with.

Pre-money vs. post-money SAFEs

There are two generations of SAFE. The original was a pre-money SAFE. In 2018, Y Combinator released the post-money SAFE, which is now the market standard. The difference matters. A post-money SAFE fixes the investor’s ownership percentage after all SAFEs convert but before the new priced-round money arrives, which makes dilution far more predictable for both sides.

The founder risk to watch

The main risk is stacking. Raising many SAFEs at different caps, without modeling how they all convert, can produce far more dilution than expected when they land as preferred stock at the priced round. Model the conversion before you sign, not after.

This is a general explanation, not legal advice.