Full Definition
A SAFE (Simple Agreement for Future Equity) is an investment contract created by Y Combinator in 2013 that allows investors to provide capital to a startup in exchange for the right to receive equity at a future date, typically when the company raises a priced equity round.
SAFEs have become the most popular instrument for early-stage fundraising because they are simpler, faster, and cheaper to execute than convertible notes or priced rounds.
Key SAFE Features
- No interest rate or maturity date (unlike convertible notes)
- Converts to equity upon a triggering event (usually the next priced round)
- Can include a valuation cap, discount, or both
- Not a debt instrument — no repayment obligation
- Standard templates available from Y Combinator
Types of SAFEs
- Cap only: Sets a maximum valuation for conversion
- Discount only: Provides a discount (typically 15-25%) to the next round price
- Cap and discount: Investor gets the better of the two terms
- MFN (Most Favored Nation): No cap or discount, but gets the best terms given to any future SAFE investor
How a SAFE Converts to Equity
Real-World Example
A startup raises $500K via a SAFE with a $5M valuation cap. When they later raise a Series A at $10M pre-money, the SAFE converts as if the valuation were $5M, giving the investor more shares.
Frequently Asked Questions
What does SAFE stand for in investing?
Is a SAFE better than a convertible note?
What is a SAFE valuation cap?
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Related Terms
A short-term debt instrument that converts into equity during a future financing round.
The maximum company valuation at which a SAFE or convertible note converts to equity.
A percentage discount given to SAFE or convertible note holders on the next round's price per share.
The value of a company before receiving new investment in a funding round.
The first significant round of funding for a startup, typically used to build an MVP and validate market fit.
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