Glossary · Security / instrument
Simple Agreement for Future Equity (SAFE)
A simple agreement for future equity (SAFE) is a contract, introduced by Y Combinator in 2013, under which an investor pays a startup now for the right to receive shares later, normally in a priced preferred stock round.
A SAFE is not a loan: it has no interest and no maturity date. Its terms fix how the money will convert into shares, usually through a valuation cap, a discount, or both. Until it converts, the holder is not a shareholder and has only the rights written into the SAFE and any side letter.
Formulas
Post-money SAFE: conversion price and ownership
- Psafe
- price per share at which the SAFE converts when the cap applies
- Vcappost
- the post-money valuation cap written in the SAFE
- CC
- Company Capitalization as defined in the post-money SAFE: as-converted capital stock, all converting securities including every SAFE, issued and promised options and the unissued option pool, measured immediately before the priced round; it excludes the new money and, in general, any pool increase made in connection with the round
- I
- the SAFE's purchase amount
- osafe
- the holder's fully diluted ownership immediately before the new money is issued
Applies to the Y Combinator post-money SAFE (2018 onward). The original pre-money SAFE uses a capitalisation that excludes the SAFEs themselves, so ownership is not fixed in advance.
Company Capitalization when every SAFE converts at its post-money cap
- Spre
- fully diluted shares before any SAFE converts (common, preferred as converted, options and pool)
- Ij, Vcap,jpost
- purchase amount and post-money cap of SAFE j
Exact only when every SAFE converts at its cap price. If a SAFE converts at a lower discount price it receives more shares, and the capitalisation must be solved with that share count.
Conversion price with both a cap and a discount
- d
- discount rate, e.g. 0.20 for 20%
- Pround
- price per share paid by new investors in the priced round
- N
- number of shares issued to the SAFE holder
A cap-only post-money SAFE also converts at the round price if that is lower than the cap price, so the holder never pays more than new investors. YC withdrew its cap-and-discount post-money form in 2021; the combination now appears in negotiated or earlier forms.
Origins and standard forms
Y Combinator (YC) published the SAFE in late 2013 as a simpler alternative to the convertible note for early financings. The original version measured the cap against the company's capitalisation before the SAFEs converted (a pre-money SAFE). In 2018 YC replaced it with the post-money SAFE, which measures the cap after all SAFEs convert, and replaced the original SAFE's default pro rata right, which applied to the round after conversion, with an optional side letter covering the round in which the SAFE converts. YC's current standard post-money forms are a valuation-cap version, a discount version and a most favoured nation (MFN) version with neither cap nor discount; a cap-and-discount version was withdrawn in 2021. YC publishes these forms for US companies, with separate valuation-cap versions for companies formed in Canada, the Cayman Islands and Singapore; instruments used in other countries follow local company and tax law.
Valuation cap
The cap is a ceiling on the price at which the SAFE converts, not a valuation of the company. If the priced round values the company above the cap, the SAFE converts at the cap price and the holder receives more shares per dollar than new investors; if the round is priced below the cap, the cap does not bind. A post-money cap and a pre-money cap of the same number mean different things: the post-money cap already includes the SAFEs, so it implies a lower price per share than an equal pre-money cap.
Discount
A discount gives the holder a lower price than new investors pay, for example 20% off the round price. Where a SAFE has both a cap and a discount it converts at whichever gives more shares. A discount alone sets no ceiling, so in a highly priced round a discount-only SAFE buys relatively few shares.
MFN SAFE
An MFN SAFE has no cap and no discount. If the company later issues SAFEs on better terms before the MFN SAFE converts, the holder may elect to adopt those terms. It defers both price and terms, and is typically used for small early cheques when a cap has not been agreed.
Pre-money versus post-money SAFE
The difference lies in what the capitalisation used to compute the cap price includes. In the pre-money SAFE it excluded the SAFEs and other convertible instruments, so the holder's percentage depended on how much was later raised on SAFEs; every additional SAFE diluted earlier SAFE holders as well as founders. In the post-money SAFE the capitalisation includes the shares issued on conversion of all SAFEs, so, when the cap sets the conversion price, each holder's percentage before the new money is purchase amount divided by the post-money cap, and all dilution from additional SAFEs falls on the existing holders, mainly founders and option holders. The post-money SAFE also generally leaves an option pool increase made for the priced round out of the capitalisation (the pre-money SAFE included it), so SAFE holders are diluted by that increase along with founders. Both versions are diluted by the priced round's new money.
Sale, dissolution and the shadow series
If the company is sold before the SAFE converts, the post-money SAFE pays the greater of the purchase amount (a cash-out) and the amount the holder would receive on an as-converted basis at the cap. In a dissolution the holder is entitled to its purchase amount, behind creditors, on par with other SAFEs and preferred stock, and ahead of common stock. When it converts in a priced round, a SAFE normally converts into a "shadow" series of the new preferred stock whose liquidation preference per share equals the SAFE's conversion price rather than the price paid by new investors, so, where the new preferred carries a 1x preference, the SAFE holder's liquidation amount equals its purchase amount.
How investors and LPs treat SAFEs
For a venture fund, an unconverted SAFE is an investment held at fair value, not at its cap. Funds and their LPs track the implied ownership of unconverted SAFEs because a cap table that shows only issued shares understates the claims on the company. A stack of SAFEs with different caps and discounts can make the next priced round harder to price and can leave founders with less ownership than they expected, which new lead investors examine before setting terms.
Worked examples
Illustrative post-money SAFE conversion
A company has 9,000,000 fully diluted shares. An investor buys a $1m SAFE with a $10m post-money valuation cap. Ownership at the cap is 1,000,000 / 10,000,000 = 10%. The capitalisation behind the cap is 9,000,000 / 0.90 = 10,000,000 shares, so the cap price is $1.00 and the SAFE converts into 1,000,000 shares, before the priced round's new money dilutes everyone.
A second SAFE is added
Before the priced round the company sells a further $1.5m SAFE at the same $10m post-money cap (15%). The capitalisation behind the cap becomes 9,000,000 / (1 − 0.10 − 0.15) = 12,000,000 shares and the cap price falls to $0.8333. The first investor now receives 1,200,000 shares and still owns 10%; the second owns 15%; the founders and option holders fall from 90% to 75%.
The same two SAFEs as pre-money SAFEs
Under the original pre-money SAFE the cap is a pre-money figure applied to a capitalisation that excludes the SAFEs. With a $9m pre-money cap and 9,000,000 existing shares, the cap price is $1.00 whichever SAFEs are sold, so the $1m SAFE converts into 1,000,000 shares and the $1.5m SAFE into 1,500,000. Together they hold 2,500,000 of 11,500,000 shares: 8.7% and 13.0%, leaving existing holders with 78.3%. The second SAFE diluted the first SAFE holder as well as the founders, which the post-money form avoids.
Cap and discount together
Back to the single $1m SAFE, now with a 20% discount as well as the $10m post-money cap. The Series A is priced at $1.20 per share. The cap price is $1.00; the discount price is 0.80 × $1.20 = $0.96. The SAFE converts at the lower price, $0.96, into 1,041,667 shares. If the round had been priced at $1.30, the discount price ($1.04) would be above the cap price and the cap would apply.
Examples are illustrative; figures are not market data.
Not the same as
- Convertible Note: A convertible note is debt: it accrues interest, has a maturity date and makes the holder a creditor. A SAFE has neither interest nor maturity.
- Warrant: A warrant is a right to buy shares at a fixed exercise price that the holder must pay; a SAFE is prepaid and converts automatically on its trigger.
- Preferred Stock (Venture Convertible Preferred): A SAFE holder is not yet a stockholder; it becomes one only on conversion, usually into a shadow series of preferred stock.
Common mistakes
- Treating the cap as the company's valuation or as the fund's mark.
- Calculating post-money SAFE ownership after the new money. Purchase amount divided by the post-money cap is the ownership immediately before the priced round's new shares are issued.
- Mixing pre-money and post-money SAFE arithmetic on the same cap table.
- Assuming a SAFE causes no dilution until it converts. For a capped post-money SAFE the dilution is largely set when it is signed and realised when it converts.
- Forgetting that a post-money SAFE holder is diluted by an option pool increase made for the priced round.
Edge cases
- The company never raises a priced round: the SAFE stays outstanding with no maturity and pays out only on a sale or dissolution.
- A cap table with both pre-money and post-money SAFEs requires solving the conversion jointly; neither form's arithmetic applies on its own.
- Accounting: the issuer's balance-sheet classification of a SAFE (liability or equity) is a separate technical question that depends on its terms; legal form alone does not settle it.
Questions
Is a SAFE debt or equity?
Legally it is neither a loan nor stock: it is a contract right to future equity, which Y Combinator describes as an equity security. It has no interest or maturity. How the issuer classifies it in its accounts is a separate question that depends on its terms and the accounting framework.
What is the difference between a pre-money and a post-money SAFE?
A post-money SAFE counts all SAFEs in the capitalisation behind its cap, so, when the cap applies, the holder's ownership before new money is investment divided by cap. A pre-money SAFE excludes the SAFEs, so later SAFEs dilute earlier ones.
What happens to a SAFE if the company is acquired?
Under the post-money SAFE the holder receives the greater of its purchase amount and its as-converted share of the proceeds at the cap.
Sources
- Y Combinator SAFE (post-money) documents and SAFE User Guide. Y Combinator, Post-money SAFE introduced 2018. Status: Current (checked 2026-10-01). Post-Money SAFE User Guide: introduction (pp. 3-4); Q&A A.3-A.7, B.1-B.6, E; Appendix I; Appendix III (Version 1.0, 2018-09-28; Version 1.1, 2021-08-28); ycombinator.com/documents form list — supports: 2013 origin; 2018 post-money SAFE; current forms and the 2021 withdrawal of the cap-and-discount form; country versions; Company Capitalization (SAFEs included, round pool increase excluded); liquidity and dissolution treatment and priority; Safe Preferred Stock; MFN provision; replacement of the pro rata right by a side letter
- International Private Equity and Venture Capital Valuation Guidelines (2025 edition). IPEV Board, IPEV, Published 11 December 2025; in effect for quarterly reporting periods beginning on or after 1 April 2026; early adoption encouraged. Status: Current; supersedes the December 2022 edition (checked 2026-10-01). Sec. II 5.20 Venture Debt and Convertible Instruments, pp. 67-68 — supports: SAFEs are valued at fair value (option pricing model or scenario analysis); an implied cap or round valuation is not a direct reference for fair value
Related terms
10 termsReferenced by
1 termConcept record
- Concept ID
- ALTSS-VC-011
- Classification
- Security / instrument
- Topics
- Venture capital & startups
- Version
- 2.0.0
- Last reviewed
- Structured data
- JSON