Simple Agreements for Future Equity (SAFEs) have become the go to vehicle for early-stage fundraising. Created by YC in 2013, they let founders quickly raise capital without the time and complexity of traditional priced equity rounds.
If you’re a first-time founder, here’s what you need to know.
At its core, a SAFE is not a loan or equity; it’s a promise. In exchange for cash now, investors receive the right to convert their investment into equity at a later date—typically when the company raises its next priced funding round.
Key Terms: Valuation Cap and Discount:
A valuation cap in a SAFE is the maximum valuation at which the investor's investment converts into equity, helping reward early investors for taking on more risk. For example, if an investor’s SAFE has a $5M cap and the startup raises a priced round at $10M, the investor’s equity converts as if the valuation were $5M, effectively giving them a larger ownership stake.
Similarly, a discount rate offers investors equity at a percentage discount to the price of shares issued in the next funding round. For example, a 20% discount means investors pay 80% of the new round’s share price when their SAFE converts.
How Is a SAFE Triggered?
A SAFE typically converts into equity during a triggering event, most often a future equity financing round or an acquisition. In the case of financing, the SAFE’s terms—such as the valuation cap or discount—determine how much equity the investor receives.
What Happens When a SAFE Is Triggered?
In a priced funding round, the SAFE converts into shares at the lower of the valuation cap or the round’s valuation, minus the agreed-upon discount.
If the company is acquired before a SAFE converts, investors often receive a payout equivalent to the SAFE’s value, or the right to convert into equity at the cap to participate in the acquisition upside.
The best way to grasp how a SAFE impacts your startup is to run the numbers yourself. That’s why we’ve built a simple SAFE calculator to help first-time founders see how key terms affect their dilution.
Want a copy of the model? shoot us a note, and we’ll send it your way!
