SAFE

A Simple Agreement for Future Equity (SAFE) was introduced by Y Combinator as a simplified alternative to convertible notes. An investor provides capital today; in exchange, they receive the right to convert that capital into equity at a future priced round, typically at a discount or with a valuation cap that rewards them for investing early.

SAFEs are not debt — they do not accrue interest, have no maturity date, and do not create immediate dilution on the cap table. They are a promise of future equity, sitting as a liability until conversion. The investor's ownership is not determined until a priced round triggers conversion.

Illustrative example: an investor puts $500,000 into a SAFE with a $10M post-money valuation cap and a 20% discount. The company later raises a Series A at a $50M pre-money valuation. The SAFE converts at the lower of the cap ($10M) or the discounted Series A price, giving the early investor far more shares per dollar than the Series A investors paid.

The gotcha: post-money SAFEs (the current standard) are cleaner for founders because dilution from SAFE conversions is borne by the pre-SAFE shareholders, not the new round investors. For investors, stacking many SAFEs before a priced round can dilute each SAFE's ownership significantly. Request a "cap table model" showing post-conversion ownership before signing.