A SAFE (Simple Agreement for Future Equity) is a contract in which an investor gives a startup money today in exchange for the right to shares in the future — specifically, when the company next raises a priced round. It was introduced by Y Combinator in 2013 as a faster, cheaper alternative to a full equity round for early fundraising.

Crucially, a SAFE is not debt. There’s no interest and no maturity date, so it doesn’t hang over the company like a loan. It simply sits on the cap table as a promise of future equity until a priced round triggers its conversion.

Valuation cap and discount

A SAFE rewards early investors for taking early risk through two mechanisms:

  • Valuation cap — the maximum company valuation at which the SAFE converts. If you raise your priced round at a higher valuation, the SAFE investor still converts as if the company were worth the cap, so they get more shares for their money.
  • Discount — a percentage (often 10–20%) off the price per share that new investors pay in the round.

A SAFE may have a cap, a discount, both, or neither. When it has both, it typically converts using whichever gives the investor the better price — not both at once.

Pre-money vs. post-money SAFEs

In 2018 Y Combinator introduced the post-money SAFE, and the distinction matters more than the name suggests. With a post-money SAFE, the investor’s ownership percentage is fixed at the time they invest — it isn’t diluted by other SAFEs that convert in the same round. That’s cleaner for investors but means founders should add up all their post-money SAFEs carefully, because the dilution is more than it first appears. (For the underlying idea, see pre-money vs. post-money valuation.)

How a SAFE converts

Nothing happens to a SAFE until a priced round. At that point, the investment converts into preferred shares — the number determined by the cap and/or discount applied to the round’s terms. The earlier the SAFE and the lower its cap, the more shares it converts into. Modeling this conversion before you sign the round is how you avoid an unpleasant surprise about your own ownership.

SAFE vs. convertible note

They look similar but differ in one important way: a convertible note is debt. It carries an interest rate and a maturity date, and if it isn’t converted by maturity it can, in principle, come due. A SAFE has neither. Both convert at a future round using caps and discounts; the note just adds the mechanics — and obligations — of a loan.