What Is a SAFE? How Y Combinator’s Startup Note Converts
Most seed money in US startups now arrives on SAFEs rather than shares. Here is how the cap, the discount and the MFN clause work, and what each side gives up.
A SAFE (simple agreement for future equity) is a contract in which an investor pays a startup now for the right to receive shares later, usually in the company’s next priced round. Y Combinator created it in 2013, and its post-money version has been YC’s standard since 2018. The conversion price comes from the valuation cap or discount in the SAFE.
A SAFE is not a loan. It carries no interest rate and no maturity date, which is the main difference from a convertible note. Until it converts, the holder is not a shareholder and has no vote.
What versions of the SAFE are there?
Y Combinator publishes three post-money SAFE forms for US companies, plus an optional side letter, all free on its documents page.
| Form | How the conversion price is set |
|---|---|
| Valuation cap, no discount | Converts at the cap price, or at the round price if that is lower |
| Discount, no valuation cap | Converts at a set percentage below the round price |
| MFN (no cap, no discount) | Takes on better terms from SAFEs the company issues later, before the priced round |
| Pro rata side letter (optional) | Gives the investor a right to buy into the next priced round |
Y Combinator notes there is no separate uncapped-and-discounted form: a company that wants an uncapped SAFE uses the discount form and sets the discount rate to 100%, meaning no discount.
How does a valuation cap work?
The valuation cap is the highest company valuation at which the SAFE will convert. Under a post-money SAFE, the investor’s ownership equals the investment divided by the cap.
Y Combinator’s own example: a $1 million SAFE on a $6.7 million post-money cap buys about 15% of the company; $500,000 on the same cap buys about 7.5%. A made-up second example: $250,000 on a $10 million post-money cap converts into 2.5%.
“Post-money” here has a specific meaning. The cap counts all the SAFE money and the existing options and option pool, but not the new money from the priced round or a new option pool created in that round. So the SAFE holder’s percentage is fixed just before the priced round, and then everyone, SAFE holders included, is diluted by the new investors.
How does a SAFE convert in the next priced round?
When the company sells preferred stock at a set price, each SAFE turns into shares of that preferred stock, usually a shadow series with the same rights. The steps are mechanical:
- Compare the round’s price per share with the price implied by the SAFE’s cap (and discount, if any).
- Use the lower price. If the round values the company above the cap, the SAFE converts at the cap price, which is the reward for investing early.
- Divide the SAFE amount by that price to get the number of shares.
- The new investors then buy their shares, which dilutes all existing holders, including converted SAFE holders.
With a discount SAFE, a 20% discount means the investor pays 80% of what new investors pay. If the round prices shares at $2.00, a 20% discount SAFE converts at $1.60. The exact ownership of discount and MFN SAFEs can only be calculated at the round, because it depends on that price.
The relationship between the cap and the round’s valuation is easier to follow once the two kinds of valuation are clear; see our explainer on pre-money vs post-money valuation.
What happens to a SAFE if the company is sold or shuts down?
The SAFE spells out what happens if there is no priced round. In a sale of the company before conversion, the holder generally receives the greater of its money back or the amount it would get by converting at the cap. If the company dissolves, SAFE holders are paid ahead of common stockholders but behind the company’s creditors, which often means little or nothing is left.
A startup that never raises a priced round, never sells and keeps operating leaves the SAFE outstanding with no date by which it must convert or be repaid.
What are the trade-offs for founders and investors?
For founders, a SAFE is fast and cheap: one short standard document, no board seat and no price negotiation beyond the cap. The cost shows up later. Because post-money SAFEs fix each investor’s percentage, a founder who signs several SAFEs takes all the dilution from each one, and it adds up before the Series A arrives.
For investors, a SAFE gives early access at a capped price but no shareholder rights until conversion, no interest and no maturity date that forces repayment. Pro rata rights exist only if the investor gets the side letter.
| SAFE | Convertible note | Priced seed round | |
|---|---|---|---|
| Legal form | Contract for future equity | Debt | Preferred stock |
| Interest | None | Yes, accrues until conversion | None |
| Maturity date | None | Yes | Not applicable |
| Investor votes | No, until conversion | No, until conversion | Yes |
| Price set now | Only a cap or discount | Only a cap or discount | Yes |
Does a SAFE show up in public filings?
Sometimes. A SAFE is a security, so a startup selling it under Regulation D files a Form D notice with the SEC, which shows the amount sold and the number of investors. Many SAFE rounds are announced by press release instead, or not at all. Where SAFEs fit in a company’s path from first check to Series A is covered in our guide to how startup funding rounds work.
Bottom line
To understand a specific SAFE, read four items in the signed document: the cap, the discount, whether it is pre-money or post-money, and whether a pro rata side letter is attached. Founders who issue several SAFEs can add up each investor’s percentage (amount divided by post-money cap) to see their total dilution before the priced round. Tax and legal questions about a specific SAFE go to a startup attorney or tax professional.
FAQ
Is a SAFE debt?
No. A SAFE has no interest rate and no maturity date, and the company does not have to repay it on a schedule. It ranks ahead of common stock but behind creditors if the company dissolves.
What is the difference between a pre-money and post-money SAFE?
The original 2013 SAFE used a pre-money cap, so each new SAFE diluted earlier SAFE holders. The post-money SAFE, standard at Y Combinator since 2018, fixes each holder’s percentage, which makes ownership easier to calculate but shifts that dilution to founders.
Can a SAFE have both a cap and a discount?
Some negotiated SAFEs do, but Y Combinator’s current standard forms offer either a cap or a discount, not both. Companies that use a non-standard SAFE should read the exact conversion language.
Do SAFE holders get voting rights?
Not until the SAFE converts into shares. After conversion they hold preferred stock with the same rights as that series, unless the documents say otherwise.
