If you're going through a US accelerator or raising from early-stage US investors, you'll almost certainly encounter a SAFE before you encounter a priced equity round. Most founders sign their first one without fully understanding what they've agreed to. That's worth fixing before you put your signature on one.
SAFE stands for Simple Agreement for Future Equity. It was created by Y Combinator in 2013 and has become the standard early-stage fundraising tool in the US startup ecosystem.
A SAFE is not a loan. There's no interest rate, no repayment schedule, no maturity date. You're not borrowing money that you have to pay back.
A SAFE is also not equity yet. You're not selling shares of your company when you sign a SAFE. No investor is becoming a shareholder on day one.
What a SAFE is: a promise to issue equity to the investor in the future, at a discount or cap, when a specific triggering event happens. That event is almost always a priced funding round.
In plain terms: an investor gives you money today, and in exchange, when you raise a proper equity round later, they get to convert their SAFE into shares at better terms than the new investors.
Valuation cap. This sets the maximum valuation at which the SAFE converts into equity. If an investor puts in money on a $5M cap and you later raise at a $20M valuation, the SAFE holder converts as if the valuation were $5M, not $20M. They get more shares for their money. The lower the cap, the better the deal for the investor.
Discount rate. Some SAFEs include a discount instead of (or in addition to) a cap. This means the SAFE converts at a percentage below the price new investors pay in the next round. A 20% discount means the SAFE holder pays 80 cents for every $1 of equity the new investors pay for.
Pro-rata rights. Some SAFEs give the investor the right to participate in future rounds to maintain their ownership percentage. Worth knowing whether your SAFE includes this.
MFN clause (Most Favored Nation). If you sign a SAFE with an MFN clause and then issue better-terms SAFEs to later investors, the MFN investor can claim those better terms. This matters if you're issuing multiple SAFEs over time.
Y Combinator has updated the standard SAFE template a few times. The current version (post-money SAFE, introduced in 2018) calculates ownership based on the post-money valuation of the company, which makes dilution easier to model. Earlier versions (pre-money SAFEs) calculate it differently.
This distinction matters for your cap table, especially if you're issuing several SAFEs before your priced round. It's worth knowing which version you're signing.
Signing without a cap table model. A SAFE with a $500K cap sounds fine in isolation. Ten SAFEs with various caps and discounts can add up to significant dilution by the time you hit your Series A. Model it out before you sign, even roughly.
Treating a SAFE as simple because it's called "simple." The document is shorter than a priced round term sheet. The implications are not simpler. Valuation caps, discount rates, pro-rata rights, and conversion mechanics can all have major long-term effects on your ownership.
Not having a lawyer review it. Most accelerators provide a standard template. Standard templates are starting points, not final agreements. A startup lawyer can review a SAFE quickly and flag anything unusual. This is not the place to cut corners.
Not having the right company structure. A SAFE is designed for a C-Corp. If you haven't incorporated yet, or you've incorporated as an LLC, sort that out before you're signing fundraising documents.
See the documents checklist for raising on a SAFE → taxhero.vc/blogs/documents-needed-to-raise-on-a-safe
Back to the full US incorporation guide for accelerator founders → taxhero.vc/blogs/us-company-incorporation-guide-accelerator-founders
Know your company's tax obligations before your first investors come in. Get your free startup tax calendar.
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This article is for informational purposes only and isn't legal or tax advice. Consult a licensed professional for your specific situation.
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