What is a SAFE Agreement?
A SAFE (Simple Agreement for Future Equity) is a legal contract between an investor and a startup company. Created by Y Combinator in 2013, SAFEs have become the dominant instrument for early-stage startup investment in the United States.
Unlike traditional equity or convertible notes, a SAFE is not a loan and doesn't give you immediate equity. Instead, it gives you the right to receive shares in the future when specific "triggering events" occur - typically a priced equity financing round.
Why SAFEs Became Standard
SAFEs replaced convertible notes because they're simpler - no interest rate, no maturity date, no default risk. For founders, this means less negotiation. For investors, it means a straightforward path to equity.
SAFE Agreement Generator
Generate a Y Combinator-style SAFE agreement with your custom terms. Choose valuation cap, discount rate, and other provisions.
SAFE Agreement Generator
Create a customized SAFE agreement based on YC's standard template
Key SAFE Terms Explained
Valuation Cap
The valuation cap is the maximum company valuation at which your SAFE will convert to equity. It protects you if the company's valuation skyrockets before the next funding round.
Example: Valuation Cap Protection
With $5M cap: $100K / $5M = 2.0% ownership
Your cap saved you from 75% dilution!
Discount Rate
The discount gives you a percentage reduction on the price per share that Series A investors pay. Common discounts range from 10% to 25%.
Example: Discount Calculation
Your discounted price: $1.00 x (1 - 0.20) = $0.80 per share
Your shares: $50,000 / $0.80 = 62,500 shares
Series A investor gets: $50,000 / $1.00 = 50,000 shares
Cap vs. Discount: Which Applies?
When your SAFE has both a valuation cap AND a discount, you get whichever calculation results in more shares. This is investor-friendly - you're protected both by absolute valuation (cap) and relative pricing (discount).
Post-Money vs. Pre-Money SAFEs
This is crucial and often misunderstood:
| Feature | Pre-Money SAFE (2013) | Post-Money SAFE (2018+) |
|---|---|---|
| Ownership Clarity | Unclear until conversion | Clear from signing |
| Dilution from Other SAFEs | Yes - unpredictable | No - fixed ownership % |
| How Cap Works | Cap excludes SAFE investors | Cap includes SAFE investors |
| Current Standard | Legacy, avoid if possible | YC recommended |
Watch Out for Pre-Money SAFEs
Some startups still use pre-money SAFEs because the cap number looks lower (founder-friendly). If a founder insists on pre-money, ask them to explain how your ownership will be calculated - many don't fully understand the difference themselves.
Pro-Rata Rights
Pro-rata rights (also called "participation rights") give you the option to invest additional money in future rounds to maintain your ownership percentage. This is valuable if the company is successful - without pro-rata rights, each subsequent round will dilute your stake.
MFN (Most Favored Nation) Clause
An MFN clause protects early SAFE investors if the company later issues SAFEs with better terms. If a new investor gets a lower cap or higher discount, your SAFE automatically updates to match.
Types of SAFEs
Y Combinator offers four standard SAFE templates, each suited for different situations:
| SAFE Type | Valuation Cap | Discount | Best For |
|---|---|---|---|
| Cap, No Discount | Yes | No | Most common; clear valuation expectations |
| Discount, No Cap | No | Yes | When valuation is hard to determine |
| Cap and Discount | Yes | Yes | Maximum investor protection |
| MFN, No Cap or Discount | No | No | Very early stage; first investor |
When Does a SAFE Convert?
Your SAFE converts to equity upon specific "triggering events":
1. Equity Financing (Most Common)
When the company raises a "priced round" (typically Series A), your SAFE converts to the same class of stock the new investors receive, but at your capped or discounted price.
2. Liquidity Event
If the company is acquired or goes public before raising a priced round, you either:
- Receive your investment amount back (1x), or
- Convert to common stock based on the cap and participate in the proceeds
You get whichever is greater. This protects you if the company sells for less than your cap.
3. Dissolution
If the company shuts down, you're treated as a creditor and receive your investment back before common shareholders - but only if there's money left after paying other creditors.
No Conversion on Bridge Rounds
SAFEs typically don't convert on convertible note rounds or additional SAFE rounds. They wait for a true priced round where the company issues preferred stock with a negotiated valuation.
Considerations for Foreign Investors
Tax Implications
- No Tax at Investment: Investing in a SAFE is not a taxable event
- No Tax at Conversion: Converting to equity is generally tax-free
- Capital Gains at Exit: When you sell shares, gains may be taxable depending on your residency and tax treaty
- QSBS Exclusion: If the company qualifies, you may exclude gains from US tax
Currency and Wire Transfers
- Investment amounts are in USD
- Wire transfer instructions will be provided by the company
- Keep documentation of fund source for compliance
Document Review
I strongly recommend having any SAFE agreement reviewed before signing. While SAFEs are "standard," companies sometimes modify terms in ways that harm investors. Common modifications to watch for:
- Changes to liquidation preference language
- Unusual conversion mechanics
- Restrictions on transfer rights
- Missing or modified MFN provisions
Need Help with Your SAFE Investment?
I review SAFE agreements for foreign investors, explain the terms, and help you negotiate better provisions when appropriate.
Sergei Tokmakov, Attorney — California Bar #279869