YC SAFE for U.S. Companies
TL;DR
A SAFE (Simple Agreement for Future Equity) lets startups raise funds without setting a valuation upfront.
Unlike equity sales, SAFEs don’t require immediate valuation or complex shareholder agreements.
Unlike convertible notes, SAFEs aren’t debt so there’s no interest or maturity date.
Investors get equity in a future financing round or a payout during a liquidity event.
SAFE doesn’t make the investor a company’s shareholder outright.
What is a SAFE?
A SAFE is an agreement where an investor provides capital to a startup in exchange for the right to receive equity in the future, typically during a priced equity round or a liquidity event like an acquisition or IPO. It’s not a loan, so there’s no interest or repayment obligation. The SAFE converts to equity under specific conditions, allowing startups to postpone valuation discussions and legal complexities until a later financing stage.
Key Terms
Valuation Cap: The maximum company valuation used to calculate how many shares the SAFE investor gets.
Discount (optional): A discount on the next round’s share price. For example, if the discount rate is set at 90% in the SAFE, the investor will receive a 10% discount on the price paid by the priced round investors.
MFN (Most Favored Nation) (optional): Lets investors get the best terms offered to others if multiple SAFEs are used in the current or future rounds.
Pro Rata Rights (optional): Allows investors to maintain their ownership percentage by the priority right to invest in future rounds within the scope of their proportional stake.
SAFE Conversion Explained
When a SAFE converts in a priced equity round, the number of shares the investor gets is calculated using the following formula:
Investor’s Shares = (Purchase Amount × Company Capitalization) / Valuation Cap
Where:
Purchase Amount is the amount the investor paid under the SAFE
Company Capitalization is total shares outstanding before the new financing round (includes all converting SAFEs and options)
Valuation Cap is the agreed max valuation for conversion
This formula ensures the SAFE investor receives shares at a price based on the capped valuation, even if the company raises at a higher valuation in the priced round.
Example
If:
Purchase Amount = $100,000
Valuation Cap = $5,000,000
Company Capitalization (pre-money) = 10,000,000 shares
Then:
Investor’s Shares = (100,000 × 10,000,000) / 5,000,000 = 200,000 shares
The investor receives 200,000 shares, which represents 2% post-money ownership.
Common Missteps
Using different SAFE versions: Mixing pre- and post-money SAFEs leads to confusion in ownership calculations.
Ignoring dilution: Post-money SAFEs can significantly dilute founders if not tracked properly.
Lack of transparency: Founders often underestimate the cumulative effect of multiple SAFEs.
Best Practices
Use Post-Money SAFEs only for consistency and clarity.
Track your cap table actively: Know who owns what if all SAFEs convert.
Communicate with investors: Make sure they understand what they’re getting.
Be cautious about issuing SAFEs too freely: Generously handing out SAFEs without modeling their cumulative impact can backfire. In a priced round or liquidity event, these SAFEs convert into equity, potentially causing significant founder dilution and weakening your ownership and control in the company.
One document. Countless deals.
FAQ
The exercise price of the shares under the FAST agreement will be determined at the time of issuance and will be included in the applicable Stock Purchase Agreement.
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