Simple Agreement for Future Equity (SAFE)

Weighing your fundraising options as an early-stage founder can be overwhelming, but there’s one solution that stands out for its simplicity: The SAFE agreement. 

What is a SAFE agreement?

A SAFE (Simple Agreement for Future Equity) is a legal contract between a startup and an investor that allows the investor to purchase equity in the company at a future date (typically during your company’s next priced round or during a liquidity event).

SAFEs were first developed by Y Combinator in 2013 as an alternative to convertible notes. A SAFE agreement is a type of convertible instrument, but unlike debt instruments, SAFEs do not accrue interest or have a maturity date, making them an attractive fundraising option for early-stage startups.

How does a safe agreement work?

A SAFE operates like any other type of legal contract. Key terms like a valuation cap or discount rate incentivize investors with the opportunity to receive shares at a favorable price when the SAFE converts into shares.

SAFEs are flexible, as they don’t carry interest or have a maturity date, which makes them more appealing for startups that want to avoid debt or immediate shareholder obligations. However, until the SAFE converts, investors have no voting rights or ownership in the company. Once a triggering event occurs, the SAFE converts to equity based on the agreed terms, allowing investors to receive shares at a lower cost than future investors.

Pre-money vs. post-money SAFEs

When issuing SAFEs, there are two options: pre-money or post-money valuation caps. In other words: will your agreement be based on a fixed ownership percentage for your investor or not?

Pre-money SAFEs do not set a fixed ownership percentage for the investor and are therefore more “founder friendly.” Pre-money SAFEs converting into equity are diluted by other SAFEs or convertible instruments issued by the company, which makes it difficult to determine an investor’s final ownership percentage until after a priced round.

Post-money SAFEs, on the other hand, lock in an investor's ownership percentage upfront, providing more clarity for both the company and investors. However, post-money SAFEs tend to dilute the founders' ownership more in future rounds.

What’s the difference between a SAFE and a priced round?

A company’s valuation and the type of equity exchanged set SAFEs apart from priced rounds.

Company valuations

During a priced round, such as a Series A round, an investor gives funds based on a negotiated valuation of the company. By contrast, a SAFE agreement does not rely on a valuation. This comes in handy for very early-stage companies that often don’t have a value for their company yet. A priced round is therefore more structured, while SAFEs are typically looser and more flexible.

Equity type

In exchange for the money they give you during a priced round, you give investors shares of equity in your startup. When fundraising with SAFEs, however, you don’t give investors anything right away; instead, you promise them future shares of stock in exchange for their investment today.

What’s the difference between a SAFE and a convertible note?

There are two key differences between SAFEs and convertible notes: debt and conversion times.

Debt

A convertible note is a type of convertible instrument (like a SAFE), meaning it converts into equity at a particular time. However, unlike a SAFE, a note is considered debt, which means it comes with an interest rate and maturity date (also known as an expiration date). A SAFE does not come with an interest rate or maturity date, but it typically includes either a valuation cap, a conversion discount, or both to protect investors.

Conversion

The timing of when equity converts is a key differentiator between SAFEs and convertible notes; both instruments convert equity at different times. While SAFEs convert into equity during the next priced round (no matter how much money your company raises), convertible notes typically convert into equity only when you raise a certain amount of capital in a priced round, for example, $1 million. 

When do startups prefer SAFEs?

Fundraising with SAFEs may be the right choice if your company:

1. Is not prepared to negotiate a formal valuation with VCs

2. Wants more flexibility

When an early-stage company does not have a set valuation, or when a founder is not ready to issue investors preferred stock in exchange for capital, using SAFEs often makes more sense. Convertible notes and SAFEs, on the other hand, offer more flexibility and control if you’re still figuring out where your company is headed.

What type of company can issue a SAFE?

If you’re considering fundraising with SAFEs, your company generally needs to be classified as a C-corporation ( C-Corp), meaning you have a set ownership structure and pay corporate income taxes on your profits and losses. There are instances where LLCs may be able to raise SAFEs, but the process is more complicated. In general, it’s generally easier to fundraise as a C-corp rather than an LLC, since investors view LLCs as inherently riskier. 

In any case, it’s a good idea to consult your lawyer for more information on the regulations and process of issuing SAFEs.

The easiest way to issue SAFEs

Create agreements, collect signatures, and receive funding—all through one connected platform.

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Safe agreement template

At Carta, we offer and support a variety of SAFE templates, including YC templates, Carta templates, and custom templates you may receive from your law firm. Our SAFE Financings product facilitates the fundraising process for you at every stage: from issuing a new SAFE to getting the final sign off from investors.

The key SAFE terms you need to know

Having an understanding of the below concepts is critical to successfully fundraising with SAFEs: 

Valuation cap

A valuation cap is the maximum valuation—for purposes of determining the price-per-share—at which an investor’s money converts into equity. SAFEs come with valuation caps to entice early investors and reward them for taking a risk on your company in its infancy. 

If the valuation of the company in the priced round is higher than the valuation cap of a SAFE, the SAFE will convert into equity at a lower price-per-share than the price paid by investors in the priced round. 

Discount price (conversion discount)

The discount price, often called a conversion discount, gives investors a discount on the price-per-share when their SAFE converts into equity. If, for example, Series A investors pay $1 per share during a priced financing round, a SAFE holder with a conversion discount will get to purchase their shares at a rate below $1 per share. 

If a SAFE has a valuation cap and a conversion discount, the investor typically gets to take advantage of whichever option gets them a lower price-per-share. 

Most Favored Nation clause

The Most Favored Nation (MFN) clause, which appears in the legal documents detailing the terms of a SAFE, protects investors.

The MFN clause typically states that if you issue additional convertible securities to future investors with better investor rights (a lower valuation cap, for example), those terms will automatically apply to your first investor’s SAFE as well. Once an investor’s SAFE converts into stock, however, the MFN clause no longer applies. 

Qualifying round

Otherwise known as a qualifying event or transaction, a qualifying round is the priced funding round at which a SAFE will convert into equity. When early-stage fundraising with SAFEs, typically any priced round will be a qualifying round. 

Exit event

An exit event refers to a change of control within your company, like an IPO or liquidity event. If you undergo an exit event before your SAFEs convert into equity, investors holding SAFEs will receive cash proceeds in amounts proportional to their individual investment terms.

Four factors to consider before you raise a SAFE

Before you begin fundraising with SAFEs, take some time to reflect on your company’s goals and equity distribution plan. Answering the following questions will give you a better idea of whether or not SAFEs are a good fundraising solution for your company.

1. How much of your company’s equity do you plan to give up?

The more investors you bring in and the more money you raise via SAFEs, the more your shares will be diluted. It can be tricky to know how much equity you’re losing when you issue a SAFE, since you’re not actually giving away a specific number of shares of stock upfront. 

However, it’s crucial to at least estimate how much your shares will be diluted once the SAFE converts into equity. Here at Carta, we created a free SAFE conversion calculator to help you with these estimates.

2. How much money do you want to raise in your next priced round?

You may not be able to predict exactly how much money you’ll raise during a future financing round, but you should have a clear idea of your fundraising goals. 

If you raise too much money via SAFEs, you could end up over-diluting your Series A investors when those SAFEs convert into equity. Saving a certain amount of equity for your next priced round, however, can help ensure future investors stay interested and motivated. 

3. What milestones will you use the money to reach?

During your seed round, you want to raise enough money to reach the specific milestones that will increase your company valuation and set you up for success during your Series A round. Milestones could be achieving an internal growth goal, launching a product within a certain timeframe, hitting a specific fundraising target, or attracting a particular investor. 

Defining your milestones helps you set more realistic fundraising goals, so you can raise enough money to grow your company while avoiding excessive dilution.

4. How will you track your SAFE investments?

A common mistake many early-stage entrepreneurs make is neglecting to properly record their outstanding SAFEs. Each SAFE you issue might have a different valuation cap or conversion discount, and if you don’t keep track of these details, you can end up diluting your ownership more than you wanted to. 

Fortunately, staying on top of your various SAFE investments doesn’t have to be complicated. Carta can help you track all your investments with our cap table management software. 

Advantages and disadvantages of fundraising with SAFEs

As with any fundraising method, there are both benefits and drawbacks to raising money via SAFEs.

Getting started with SAFEs

SAFEs are an effective, easy way to fundraise for your company during its seed round. They’re straightforward, affordable, and fast to issue; however, they can also cause potential over-dilution problems if you’re not careful. 

If you’re interested in raising money with a SAFE, take some time to assess your goals and fundraising targets, then check out how Carta can help you stay on top of your cap table. 

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