SAFEs: how a simple agreement for future equity works

The investor wires money and signs a short agreement. No shares change hands and no price is set. When you later raise a priced round (sell preferred stock at a set price per share), the SAFE converts into shares of that round, at a price set by its terms. If the company is sold first, the SAFE holder usually gets the greater of their money back or what the SAFE would have converted to. If the company shuts down, SAFE holders rank behind creditors but ahead of common stockholders for any money left.

Because there is no interest or maturity date, a SAFE never comes due. That is the main difference from a convertible note.

Y Combinator's standard post-money SAFE comes in three US versions:

• Valuation cap, no discount. The standard. The cap sets the maximum valuation at which the SAFE converts.
• Discount, no cap. The SAFE converts at a discount to the next round's price. When a discount is used, 20% is the most common.
• Uncapped MFN. No cap or discount, but the holder can take the better terms of any later SAFE you issue before the priced round.

There is no YC form with both a cap and a discount. An optional pro rata side letter gives a capped SAFE holder the right to buy into the round where the SAFE converts.

On a post-money SAFE, the investor's percentage is fixed the day they sign: their investment divided by the post-money valuation cap. Every SAFE you issue afterward comes out of the founders' share, not the earlier SAFE holders'. That is what makes it easy for investors to understand and expensive for founders to stack. The older pre-money SAFE worked the other way, which is why it gave way to the post-money version in 2018.

Work back from dilution. The cap is roughly what you are raising divided by the share of the company you are willing to sell. Raising $1.5M for 10% to 15% points to a post-money cap of about $10M to $15M. Then sanity check it against the market: the medians below, your traction, and what comparable companies raised at. Some founders raise the cap as a round fills and demand builds; agree the approach with your lawyer and keep earlier investors informed.

You raise $1M on post-money SAFEs at a $10M cap: one $500K check, two at $200K and one at $100K. Under a post-money SAFE, each holder's ownership is simply the investment divided by the cap, and the SAFEs add up:

• $500K ÷ $10M = 5%
• $200K ÷ $10M = 2%, twice
• $100K ÷ $10M = 1%
• Total: 10% to SAFE holders, measured just before the priced round's new money

A year later you raise a seed round, selling 20% to new investors and creating a 10% option pool. Both dilute the SAFE holders along with everyone else, so their 10% ends around 7% (without the new pool it would be 8%). If you had raised another $1M on SAFEs at the same cap in between, SAFE holders would own 20% before the round, and it would come out of the founders' stake. That is the stacking effect: each SAFE looks small on its own.

• Usage: about 9 in 10 unpriced pre-seed raises on Carta are SAFEs, the rest convertible notes. At seed, about two-thirds of rounds were SAFEs in Carta's Q4 2023 to Q3 2024 data, with larger seed rounds mostly priced.
• Caps: median about $7.5M for raises under $250K, $10M for $250K to $1M, and $15M for $1M to $2.5M (Carta, 2025); about $35M for SAFEs over $2.5M in Q2 2026.
• Discount: usually none on the standard SAFE; 20% when one is used.

• Deferred dilution. Nothing shows on the cap table until conversion, so it is easy to overissue. Model every SAFE before you sign it.
• No board, no lead. A SAFE round has no lead investor setting terms or taking a board seat, which is fast but leaves you without the governance and accountability a priced round brings.
• Pressure on the priced round. A large SAFE overhang plus a new option pool can push founders below where a new lead is comfortable.
• Accounting. Many SAFEs are recorded as liabilities until they convert. Get the treatment right before an investor reads your balance sheet.

A SAFE fits when you are raising a small, early round from angels and pre-seed funds who don't need to set a price, and speed matters more than governance. It fits less well once a lead investor wants to set terms and take a board seat, once you have raised several SAFEs already, or when an investor needs the protections of debt, which is where a convertible note or a priced round comes in.