SAFE (Simple Agreement for Future Equity)
A SAFE is a financing instrument that allows investors to fund a startup now in exchange for equity in a future priced round, typically with a valuation cap and/or discount.
Allocator relevance: Common in early-stage venture—terms affect ownership outcomes and can change effective entry price versus priced rounds.
Expanded Definition
SAFEs convert into equity later, usually at the next priced round, using the cap/discount terms to determine conversion. They are faster and simpler than priced rounds but can create complexity when multiple SAFEs stack, dilution surprises occur, or the conversion round is delayed. For venture allocators, understanding SAFE terms is necessary for evaluating underwriting discipline and ownership expectations in early portfolios.
How It Works in Practice
Investors sign SAFEs at pre-seed/seed, then conversion happens at Series A or another priced round. The cap/discount determines the investor’s effective price relative to new investors.
Decision Authority and Governance
Managers must enforce underwriting standards on caps, discounts, and dilution implications. Governance should ensure SAFE usage doesn’t replace real diligence or encourage “valuation chasing.”
Common Misconceptions
- SAFEs are “standard” and don’t require term diligence.
- SAFEs guarantee better entry price.
- SAFEs reduce investor risk (they reduce legal complexity, not business risk).
Key Takeaways
- SAFE terms shape ownership outcomes materially.
- Stacking SAFEs can create hidden dilution.
- Underwriting discipline matters even when instruments are simple.