Simple Agreement for Future Equity (SAFE): A Complete Guide

Raising capital is one of the biggest challenges for early-stage companies. At the seed or pre-seed stage, most founders don’t yet have enough revenue, users, or traction to justify a formal valuation. Without these benchmarks, negotiating a priced equity round becomes both time-consuming and expensive. 

That’s where the SAFE (Simple Agreement for Future Equity) comes in. 

SAFEs allow companies to raise capital quickly with minimal paperwork, while investors benefit from valuation caps or discounts when the SAFE converts into equity.

What is a Simple Agreement for Future Equity (SAFE)?

A SAFE (Simple Agreement for Future Equity) is an investment contract that allows investors to put money into a company today in exchange for the right to receive equity in the future, usually at the next priced funding round. 

It was introduced by Y Combinator in 2013 as a faster and simpler alternative to priced equity. 

SAFEs are not debt instruments, which means they do not accrue interest or require repayment. Instead, they are designed to convert into equity when a trigger event occurs.

Key features of SAFEs:

• No maturity date or repayment obligation.
• No interest payments.
• Conversion into equity only on a defined trigger event (commonly the next financing round).
• Often include a valuation cap and/or discount to reward early investors.

This structure works well in the United States because the legal system allows such open-ended contracts that defer valuation and repayment decisions. 

But according to the Indian corporate law under the Companies Act, 2013 requires every instrument to fall into a defined category such as equity, preference shares, or debt. A SAFE, in its US form, does not neatly fit into any of these categories.

As a result, the original YC SAFE would not be enforceable in India because it sits outside the boundaries of company law and regulatory definitions. 

To address this gap, 100X.VC introduced the iSAFE note in 2019.

What is a Simple Agreement for Future Equity in India (iSAFE)?

The iSAFE (India Simple Agreement for Future Equity) is structured very differently from the US SAFE.

Instead of being a simple contract, the iSAFE is issued in the form of Compulsorily Convertible Preference Shares (CCPS). 

This means:

• Investors subscribe to preference shares at the time of investment, which are compulsorily converted into equity at the next financing round or another predefined trigger event.
• Since CCPS is a recognized instrument under the Companies Act, the iSAFE is legally valid and compliant.
• Companies still avoid immediate valuation negotiations, because the conversion terms (cap, discount) are agreed upfront, similar to a US SAFE.

How does a Simple Agreement for Future Equity (SAFE) work?

When a company issues a SAFE, the investor provides capital upfront and in return receives the right to equity in the future. The actual ownership stake is only determined at the next financing round, using conversion mechanics built into the agreement.

Pre-money vs post-money SAFEs

When Y Combinator first introduced SAFEs in 2013, they were issued as pre-money instruments. Later, in 2018, YC introduced the post-money SAFE to address some challenges around dilution and ownership visibility.

Pre-money SAFEs

• Do not set an investor’s exact ownership percentage at the time of investment.
  
• The SAFE converts into shares during the priced round, and the final ownership percentage is diluted by other SAFEs, convertible instruments, or option pool increases that are also converting or issued in that same round.
• This flexibility is more founder-friendly, since it allows companies to raise multiple SAFEs without locking in ownership upfront.
  
• However, it leaves investors with uncertainty about what percentage of the company they will eventually own.

Post-money SAFEs

• Post-money SAFEs clearly define an investor’s ownership percentage based on the company’s capitalization after the SAFE financing but before the next round of fundraising.
  
• Investors know exactly how much of the company they will own when their SAFE converts, regardless of additional SAFEs issued later.
  
• This gives investors greater clarity and negotiating leverage, but it shifts more dilution risk onto founders and early team members.
  
• For founders, it requires more careful modeling because every new post-money SAFE directly reduces their ownership stake

Suppose a company raises $1M on a SAFE with a $5M valuation cap.

Pre-money SAFE

When the company later raises a priced round at a $10M pre-money valuation, the SAFE converts at the $5M cap. However, because multiple SAFEs and an expanded option pool also convert during the same round, the final ownership percentage of the investor ends up lower than what the $5M cap alone would suggest. The exact stake is only known once all instruments are accounted for at the closing of the round.

Post-money SAFE

Using the same $1M investment on a $5M post-money cap, the investor is guaranteed 16.67% ownership ($1M ÷ $6M) regardless of how many other SAFEs are issued later. When the priced round happens, their stake is fixed, and any dilution falls on the founders and team instead.

What does a SAFE (Simple Agreement for Future Equity) include?

1. Valuation cap

The valuation cap sets the maximum company valuation at which the SAFE will convert into equity. This ensures early investors are rewarded for taking on higher risk. For example, if the cap is $5M but the company later raises a priced round at $10M, the SAFE will convert as though the company were valued at $5M, giving the investor more shares. Without a cap, early investors could be diluted heavily in later rounds.

‍2. Discount rate

The discount rate allows SAFE holders to purchase shares at a lower price than new investors in the next financing round. This functions as another incentive for investing early. A 20% discount means that if new investors buy shares at $1.00 each, SAFE holders convert at $0.80 per share. 

‍3. Trigger events

SAFEs do not convert until a “trigger event” occurs. The most common trigger is the next priced equity financing round, where preferred shares are issued.

‍4. Investor rights

While the standard Y Combinator SAFE does not grant voting or control rights, investors sometimes negotiate additional protections. These can include:

• Pro-rata rights: Allowing investors to maintain their ownership percentage by participating in future rounds.
• Information rights: Access to certain financial and operational updates.
• Liquidation preference on insolvency: Ensuring investors are repaid their initial investment before distributions go to shareholders.

Types of SAFE (Simple Agreement for Future Equity)  notes

SAFEs are typically issued in one of four forms. Each type offers a different balance of risk and reward for founders and investors:

1. SAFE with valuation cap (no discount)

A valuation cap sets the maximum company valuation at which the SAFE will convert into equity. This protects investors by ensuring they receive a favorable conversion price if the company’s value rises significantly before the next funding round.

Founders often agree to caps to make the SAFE appealing to investors, but the trade-off is that they may experience greater dilution than if the SAFE converted at the higher valuation of the next priced round.

2. SAFE with discount (no cap)

A discount provides investors a percentage discount (commonly 15–25 percent) on the next round’s share price.

It is simpler than a cap, but less protective for investors if the company’s valuation increases dramatically. Best suited for founders seeking simplicity in their SAFE agreements while still providing early investors an incentive.

3. SAFE with both cap and discount

This offers investors the stronger of the two protections: they convert either at the valuation cap or at the discounted price, whichever gives them more shares.

4. SAFE with MFN (Most Favored Nation)

This does not include a cap or discount initially. Instead, the investor has the right to adopt the most favorable terms offered to any subsequent SAFE investors.

It is useful in very early raises where founders want to close funding quickly but do not want to negotiate terms.

How SAFE (Simple Agreement for Future Equity) notes differ from convertible notes

SAFE notes and convertible notes are both instruments that allow investors to provide early-stage funding in exchange for future equity, but they differ in several important ways:

1. Debt vs non-debt

Convertible notes: Are structured as debt. They accrue interest and have a maturity date by which the company must either repay the loan or convert it into equity. The conversion to equity happens on a triggering event.

SAFE notes: Are not debt. They do not accrue interest, have no maturity date, and are designed to convert into equity only on a triggering event.

2. Repayment obligation

Convertible notes: Carry the risk that the company may need to repay the principal plus accrued interest if a conversion event does not occur by the maturity date. In practice, this rarely happens because most companies either raise a priced round, get acquired, or extend the note before maturity. Even if the company goes bust before conversion, noteholders, as creditors, have priority over equity holders to claim any remaining assets.

SAFE notes: Eliminate repayment risk, making them more founder-friendly.

3. Simplicity and legal complexity

Convertible notes: Often require more negotiation around interest rates, maturity, and creditor rights.

SAFE notes: Are simpler, usually a few pages long, and focus only on the terms of future equity conversion.

4. Investor rights before conversion

Convertible notes: As debt, investors are creditors and may have certain rights in case of insolvency.

SAFE notes: Investors do not have ownership, voting rights, or creditor status until conversion.

Conclusion

Raising early-stage capital doesn’t have to be complicated. SAFE notes provide companies with a streamlined way to secure funding while deferring valuation discussions and minimizing legal complexity. By understanding the mechanics, types, and differences from traditional convertible notes, founders can make informed decisions and confidently plan their next funding round.

FAQs

1. How does a Simple Agreement for Future Equity (SAFE) work?

A SAFE allows an investor to provide capital to a company today in exchange for the right to receive shares in the future. The SAFE converts into equity when a trigger event occurs, usually the next priced funding round. Conversion terms are based on pre-agreed conditions like a valuation cap or discount, which reward early investors for taking on higher risk. Until conversion, SAFE holders are not shareholders and have no voting rights.

2. What are the disadvantages of SAFEs?

• Uncertain dilution: Especially with pre-money SAFEs, investors cannot predict their final ownership percentage until a priced round happens.
• No investor rights until conversion: SAFE holders do not get voting rights, dividends, or board participation until conversion.
• Founder dilution in post-money SAFEs: These fix investor ownership upfront, which can significantly dilute founders and employees.

3. How to write an equity agreement (SAFE)?‍

Unlike traditional equity agreements, founders don’t “write” a SAFE from scratch. SAFEs are standardized documents (such as Y Combinator’s templates in the US or the iSAFE templates in India) that can be customized with key terms:

• Valuation cap or discount (or both).
• Type of SAFE (pre-money or post-money).
• Conversion trigger (usually the next priced funding round).
• Additional clauses (e.g., pro-rata rights, MFN clauses).

Since SAFEs are legally binding, founders should use these tested templates and adapt them with legal counsel rather than drafting their own equity agreement.