SAFE (Simple Agreement for Future Equity)
A simple investment contract that converts to equity at the next priced round.
Definition
A SAFE is a fundraising instrument invented by Y Combinator that gives an investor the right to receive equity in a future priced round. Unlike convertible notes, SAFEs have no interest rate, no maturity date, and are not debt. They convert to shares when a priced equity round occurs, based on either a valuation cap, a discount, or both. SAFEs are the most common instrument for pre-seed and seed stage fundraising.
Why it matters
SAFEs that convert at low valuation caps create more dilution than you might expect at the Series A. If a company has raised $2M in SAFEs at a $8M cap, those SAFEs may convert into a significant chunk of the cap table, diluting founders and early employees.
Example
An investor puts $200K into a SAFE with a $10M cap. At the Series A, the company is valued at $30M. The SAFE converts at the $10M cap, giving the investor 3x more shares per dollar than the Series A investors paid.