SAFE Agreement (Simple Agreement for Future Equity)
Definition
A SAFE (Simple Agreement for Future Equity) is an investment instrument created by Y Combinator that gives investors the right to receive equity in a future priced round. SAFEs have no maturity date, interest rate, or repayment obligation, making them the most common fundraising instrument for pre-seed and seed-stage startups.
Overview
A SAFE converts an investor's cash into equity at a later date, typically when the company raises a priced round (Series A or beyond). Unlike convertible notes, SAFEs are not debt. There is no maturity date, no interest accrual, and no repayment obligation if the company fails.
SAFEs come in four variants defined by Y Combinator: post-money valuation cap only, pre-money valuation cap only, discount only, or most favored nation (MFN). The post-money SAFE with a valuation cap has become the most widely used version because it provides clarity on dilution at the time of investment.
For founders, the key consideration with SAFEs is understanding the dilution math. A post-money SAFE explicitly defines ownership. A $1M investment on a $10M post-money cap gives the investor exactly 10 %. Multiple SAFEs stack, and the combined dilution can be significant if not tracked carefully on a cap table throughout the fundraising process.
Example
An investor puts $500K into a SAFE with a $5M post-money valuation cap. When the startup raises a Series A at $20M pre-money, the SAFE converts at the $5M cap, giving the investor 10 % of shares.
Related Articles
Related Calculators
Track SAFE Agreement (Simple Agreement for Future Equity) and more with culta.ai
Start free and get real-time visibility into the metrics that matter for your startup.