Simple Agreement for Future Equity (SAFE)

Simple Agreement for Future Equity (SAFE)

Definition: A SAFE is a financing instrument that gives investors the right to receive equity in a startup during a future funding round or exit event, without creating debt or immediately setting a company valuation.

Key features:

• Created by Y Combinator in 2013 as a streamlined alternative to convertible notes
• Not a debt instrument, which eliminates interest payments and maturity dates
• Contains provisions like valuation caps and discount rates that determine equity conversion terms
• Triggers conversion automatically during qualified financing rounds or liquidation events

SAFEs function like a promise for future ownership rather than an immediate equity stake or loan. When a startup raises a priced equity round, the SAFE investor's capital converts to shares, typically at favorable terms compared to new investors.

SAFE Example:

If an investor provides $100,000 via a SAFE with a $5 million valuation cap, and the company later raises at a $10 million valuation, the SAFE investor would convert at the $5 million cap rate, effectively doubling their equity compared to new investors contributing the same amount.