A SAFE (Simple Agreement for Future Equity) is the standard way to raise a pre-seed round. The investor pays now and receives preferred stock when you raise your first priced round. There’s no interest, no maturity date and no repayment. Today’s default is Y Combinator’s post-money SAFE with a valuation cap, which fixes the investor’s ownership up front: the purchase amount divided by the post-money cap. A $500,000 SAFE on a $10 million cap buys 5%.
Key takeaways
- Use the YC post-money SAFE with a valuation cap, and don’t modify the form.
- Each new SAFE dilutes the founders, not the SAFE holders who came before.
- A SAFE is a security. Securities laws apply, even though SAFE holders aren’t stockholders yet.
- Keep a one-page schedule of every SAFE you’ve signed and its terms. You’ll need it at conversion.
What is a SAFE?
A SAFE is a contract, not stock and not debt. The investor gives the company money today in exchange for the right to receive shares later, usually when the company sells preferred stock in a priced round. Unlike a convertible note, a SAFE doesn’t accrue interest and has no maturity date, so it never comes due.
Y Combinator introduced the SAFE in 2013. In 2018 it released the “post-money” SAFE, which is now the market standard because it tells founders and investors exactly how much of the company each SAFE buys.
Why do founders use SAFEs, and what’s the catch?
SAFEs are popular because they are:
- Short and standard. The YC form is about six pages, and investors already know it.
- Not debt. There’s no interest, no maturity date and no principal to repay.
- Closed one investor at a time. You can sign and take the wire as soon as each investor is ready, without coordinating a group closing. Paul Graham calls this “high-resolution fundraising.”
The catches:
- SAFE holders aren’t stockholders yet. Until conversion, they have no vote, no statutory information rights and no fiduciary-duty claims as stockholders. But a SAFE is still a security. Federal and state securities laws, including the anti-fraud rules, apply to every SAFE you sell.
- Dilution is easy to underestimate. Because each SAFE is quick to sign, founders often stack several before modeling what happens at conversion. Run the math (below) before every new SAFE.
How does a post-money SAFE work?
When it converts. The SAFE converts at your next priced round, meaning any sale of preferred stock at a set valuation, of any size. Unlike most convertible notes, there’s no minimum round size.
What it converts into. SAFE holders get the same preferred stock, with the same rights, as the new investors in that round. When you negotiate the round’s terms, you’re setting them for your SAFE holders too.
How much it buys. With a valuation cap, the SAFE holder owns at least: purchase amount ÷ post-money valuation cap. That percentage is measured just before the priced round, and the new money then dilutes everyone. If the round is priced below the cap, the SAFE converts at the round price, so the holder ends up with more.
Why stacking SAFEs costs founders. In a post-money SAFE, the cap counts every SAFE as already converted. So each new SAFE comes entirely out of the founders’ share, not the earlier SAFE holders’.
| Step | Founders | SAFE 1 | SAFE 2 | Seed investors |
| Start | 100% | |||
| SAFE 1: $250K on a $5M post-money cap | 95% | 5% | ||
| SAFE 2: $500K on a $10M post-money cap | 90% | 5% | 5% | |
| Priced seed: $3M at a $12M pre-money valuation | 72% | 4% | 4% | 20% |
Simplified: this ignores the option pool, which is usually topped up as part of the priced round and dilutes founders further.
Which version of the SAFE should I use?
Y Combinator currently publishes three post-money SAFEs, plus a pro rata side letter:
- Valuation cap, no discount. The market default. Use this one.
- Discount, no cap. The investor gets a discount (usually 20%) off the priced-round price. Rare, because investors won’t take uncapped risk.
- MFN, no cap, no discount. For small, early checks when you can’t agree on a cap yet (see below).
YC no longer publishes a “cap and discount” form. Some investors still ask for both. If you agree, use the YC cap form and add the discount in a short amendment, so the conversion math stays clear.
You may still be sent the older pre-money SAFE. It measures the cap before the SAFE money comes in, so each new SAFE dilutes earlier SAFE holders as well as founders, and ownership is harder to predict. If an investor sends one, ask to switch to the post-money form, or model the conversion before you sign.
What is a side letter, and should I sign one?
A side letter is a separate agreement that gives one SAFE investor extra rights. YC’s standard side letter grants pro rata rights: the right, but not the obligation, to buy into a future round to keep their percentage. See Pro Rata Rights.
Pro rata for larger checks is normal. Be wary of side letters that add information rights, board observer seats or special terms for one investor. Each one is a promise you have to track and honor, and your priced-round investors will ask to see them all.
Can I change the YC SAFE?
Keep the SAFE itself unmodified, so every SAFE in the round converts the same way. If an investor wants a cap on total round size, put it in your board consent. Decline liquidation multiples (such as 2x) and anti-dilution protection in a SAFE. Those belong in priced-round negotiations, if anywhere. And if an investor sends their own “SAFE,” compare it line by line with the YC post-money form. Non-YC versions sometimes hide pre-money conversion, extra preferences or a maturity date.
How do I set the valuation cap?
Work backward from dilution. Decide how much of the company you’re willing to sell in this round, then divide the amount you’re raising by that percentage. If you’re raising $1 million and are willing to sell 10%, that’s a $10 million post-money cap. Then sanity-check the result against current market data for your stage. The cap is not a valuation of your company, and it’s usually the most negotiated term in the SAFE. See Valuation Cap: Everything There Is to Know.
How does an MFN clause work?
If you later issue a SAFE (or other convertible security) on better terms, such as a lower cap or a bigger discount, an investor holding an MFN SAFE can choose to adopt those better terms. This applies to SAFEs you issue before the priced round, not to the priced round itself. In practice, that means:
- Price later SAFEs knowing the MFN holders will follow. A lower cap for one new investor becomes a lower cap for every MFN holder who opts in.
- Different caps for different investors are legal. Each SAFE is a separate contract. Just track them, because a stack of different caps and MFNs is what makes conversion messy.
What happens if the company is sold or shuts down before the SAFE converts?
- Sale or IPO: The SAFE holder gets the greater of their money back or what their shares would be worth if the SAFE had converted at the cap.
- Dissolution: SAFE holders are paid back their purchase amount after creditors, ahead of common stockholders, to the extent money is left.
A SAFE that never converts doesn’t simply disappear. It has real claims in both scenarios.
What paperwork does a SAFE round need?
- A board consent approving the SAFE form, the maximum total round size and the cap. See Startup Board Consent.
- The SAFE itself, signed by each investor, plus an accredited investor questionnaire. See Can My Startup Raise Money From Non-Accredited Investors?
- Side letters, only where you’ve agreed to them.
For a deeper walkthrough, see our Founder’s Guide: SAFE.
Related: SAFE vs. Convertible Note · Valuation Cap · Pro Rata Rights
