Question 1

What is a SAFE agreement?

Accepted Answer

A SAFE (Simple Agreement for Future Equity) is an investment contract between a startup and an investor. The investor provides capital now in exchange for the right to convert that investment into equity later, typically at the next priced round. SAFEs were created by Y Combinator in 2013 as a simpler alternative to convertible notes.

Question 2

What's the difference between pre-money and post-money SAFEs?

Accepted Answer

Pre-money SAFEs calculate the investor's ownership based on the pre-money valuation before the SAFE investment. Post-money SAFEs (the current YC standard) calculate ownership based on a post-money valuation that includes all SAFE investments. Post-money SAFEs give investors more certainty about their ownership percentage.

Question 3

What is a valuation cap?

Accepted Answer

A valuation cap is the maximum valuation at which a SAFE will convert to equity. If the company raises at a higher valuation, the SAFE investor still converts at the cap, giving them more shares. For example, with a $5M cap and a $10M Series A, the SAFE converts as if the valuation were $5M.

Question 4

What is a discount rate in a SAFE?

Accepted Answer

A discount rate gives the SAFE investor a percentage discount on the share price at the next round. A 20% discount means the investor pays 80% of what Series A investors pay per share. Discounts are often combined with caps, with the investor getting whichever provides better terms.

Question 5

Do I need a lawyer to use a SAFE?

Accepted Answer

While SAFEs are designed to be simple, legal review is recommended especially for: non-standard terms, side letters, pro-rata rights, large investment amounts, or if you're unfamiliar with securities law. The standard YC SAFE is widely accepted, but modifications should be reviewed by counsel.

Question 6

What triggers a SAFE conversion?

Accepted Answer

A SAFE typically converts upon: (1) Equity Financing - a priced round like Series A, (2) Liquidity Event - sale or IPO of the company, or (3) Dissolution - company winds down. The conversion terms differ for each scenario, with equity financing being the intended outcome.

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