Software Growth

SAFE (Simple agreement for future equity)

A SAFE is a Y Combinator contract where an investor pays now and receives equity later, when a priced round happens. It has no interest and no maturity date.

A SAFE (simple agreement for future equity) lets an investor give you money today in exchange for shares you will issue later, usually at your next priced round. Y Combinator introduced it in 2013 as a faster, cheaper alternative to negotiating a priced round or a convertible note at the earliest stage. Y Combinator publishes the standard forms on its documents page, free to use.

A SAFE is not debt. It has no interest rate and no maturity date, so nothing comes due and the investor cannot demand repayment. Until it converts, the investor holds no shares and usually has no vote.

Valuation cap

The valuation cap is the maximum valuation at which the SAFE converts. If your next round values the company above the cap, the SAFE converts as if the valuation were the cap, which rewards the investor for coming in early. Y Combinator's current form is a post-money SAFE, meaning the cap is the company valuation after all SAFE money is counted. Because of that, the investor can see their ownership right away.

Y Combinator's own example is $500,000 on a $6.7M cap, which is about 7.5 percent. A smaller one: $100,000 on a $5M post-money cap buys 100,000 / 5,000,000 = 2 percent of the company, measured before the priced round and before new investors and any new option pool.

Discount

A discount gives the SAFE holder a lower price than the new investors pay. If the Series A price is $2.00 per share and the discount is 20 percent, the SAFE converts at $1.60. A $100,000 SAFE then buys 62,500 shares. A SAFE can have a cap, a discount, both (the investor takes whichever gives the lower price), or neither. A SAFE with only an MFN clause takes the terms of any later SAFE you issue.

Pro rata and other add-ons

Y Combinator offers a separate side letter that gives the investor pro rata rights, the option to invest in future rounds to keep their percentage.

Things to watch

  • Every SAFE you sign dilutes you. Several SAFEs stack, and you only see the full effect when they convert, so keep a running cap table that models them.
  • Caps set on different dates and sizes can leave you with many different conversion prices.
  • Check the form version. Older pre-money SAFEs calculate ownership differently from the post-money version.

This is general information, not legal advice. A lawyer should review any financing.

Sources

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