Deal Terms
What is a SAFE (Simple Agreement for Future Equity)?
Quick Answer
A SAFE is an investment contract created by Y Combinator where an investor provides capital to a startup in exchange for the right to receive equity in a future priced round, with terms like a valuation cap and/or discount rate.
Detailed Answer
A SAFE (Simple Agreement for Future Equity) is a financing instrument invented by Y Combinator in 2013 as a simpler alternative to convertible notes. Unlike a convertible note, a SAFE is not debt — it has no interest rate, no maturity date, and no repayment obligation.
Key terms in a SAFE: - **Valuation Cap** — The maximum valuation at which the SAFE converts to equity, protecting the investor if the company's value increases significantly before the next round. - **Discount Rate** — A percentage discount (typically 15-25%) applied to the price per share in the next round, rewarding early risk. - **MFN (Most Favored Nation)** — A provision ensuring the SAFE holder gets the best terms of any subsequent SAFE issued. - **Pro Rata Rights** — The right to maintain ownership percentage in future rounds.
SAFEs convert to equity when a "trigger event" occurs, typically a priced equity round (Series A). The conversion price is the lower of: (a) the valuation cap divided by shares, or (b) the discounted price per share.
SAFEs are now the dominant early-stage investment instrument, used in ~75% of pre-seed and seed deals.
Related Questions
What is a term sheet?
A term sheet is a non-binding document that outlines the key terms and conditions of a proposed investment, including valuation, investment amount, board seats, liquidation preferences, and protective provisions.
What is a liquidation preference?
A liquidation preference gives preferred shareholders (investors) the right to receive their investment back before common shareholders in an exit. The standard is 1x non-participating, meaning investors get back their investment amount or convert to common stock — whichever is higher.
What is a convertible note?
A convertible note is a short-term debt instrument that converts into equity at the next priced round, typically with a valuation cap, discount rate, interest rate (2-8%), and maturity date (12-24 months).
What is anti-dilution protection?
Anti-dilution protection adjusts an investor's conversion price downward if the company raises a future round at a lower valuation (down round). The standard type is broad-based weighted average, which partially protects investors while limiting founder dilution.