SAFE (Simple Agreement for Future Equity)
A contract under which an investor pays a company now and receives shares at the next priced round, at a price set by a valuation cap, a discount, or both. It is not debt: no interest, no maturity, no repayment. Published by Y Combinator in 2013 and rewritten on a post-money basis in 2018, it is the default instrument for pre-seed and seed money in the United States. The closest UK equivalent is the advance subscription agreement.
How a startup is financed · 8 of 26Next: Post-Money SAFE
Why SAFE (Simple Agreement for Future Equity) matters in interviews
The SAFE is how most American startups take their first money, and a venture interview treats it as table stakes: not "what is it" but "what does a post-money cap do to the founders when a second one is signed", or "what does a SAFE holder get if the company is sold before a priced round". It is also the instrument candidates most often describe wrongly, usually by calling it a note, and an interviewer hears that in the first sentence.
How it works in practice
The mechanics. An investor pays the company now. Nothing is issued yet. At the next priced round the SAFE converts into shares of a "shadow" series of that round’s preferred stock, at a price set by its terms: a valuation cap, a discount to the round price, or both, converting at whichever gives the lower price. Y Combinator published the form in December 2013 and rewrote it in September 2018 so that the cap is a post-money figure, and the three current templates are cap only, discount only, and neither (with a most favoured nation clause instead).
The post-money cap is the part worth being able to do on a whiteboard. A $500,000 SAFE at a $5,000,000 post-money cap owns $500,000 ÷ $5,000,000 = 10% of the company’s capitalisation immediately before the priced round, where the capitalisation counts every share, option and converting instrument but not the new money and not the round’s pool increase. That 10% is then diluted by the round like everyone else. On a table of 8,000,000 founder shares the SAFE converts into 8,000,000 × 0.1 ÷ 0.9 = 888,889 shares; a $3m round at a $12m pre-money with a 10% pool then leaves it at 7.0%. The lab at /labs/cap-table runs this exact company.
Stacking. Under the 2018 form each SAFE owns its own fraction, so two SAFEs promising 10% and 12.5% leave the founders at 77.5% before the round, and adding a third takes its whole fraction from the founders rather than from the earlier SAFEs. Under the original pre-money form the SAFEs diluted each other and the founders together. Founders who signed six post-money SAFEs "at a $10m cap" and then discovered they had promised a third of the company are the reason the phrase "SAFE overhang" exists.
What it is not. A SAFE has no interest, no maturity date and no right to repayment. If the company is sold before a priced round, the holder gets the greater of the money back and what the cap fraction would be worth. If the company is wound up, the holder gets the money back if there is any, after the creditors and alongside any preferred stock. It is not debt, and describing it as "basically a convertible note" is the mistake the follow-up question is designed to find.
What candidates get wrong
- Calling it a note. A convertible note is a loan with interest and a maturity date; a SAFE is neither. The difference decides what happens if the company fails, and interviewers ask.
- Reading a post-money cap as a pre-money one. A $5m post-money cap on a $500k SAFE is 10%, full stop, before the round. Treating the cap as a pre-money figure understates the SAFE’s stake and overstates the founders’.
- Forgetting that the round’s pool dilutes the SAFE too. The cap fraction is measured before the pool top-up, so a 10% SAFE is under 10% once the pool the lead asked for has been created, and further under it once the new money is in.
- Assuming pro rata rights. The 2018 SAFE grants none; they come by a separate side letter, and a seed fund without one can be diluted out of its best company.
Go deeperThe SAFE’s relatives: what other countries use, and why the UK could not just adopt it
The SAFE is an American document drafted around Delaware corporate law and American tax practice, and most other venture markets have either adapted it or kept an older instrument that does the same job. Knowing which is which matters at a fund that invests across borders and in any interview that asks about UK or European seed rounds.
United Kingdom: the advance subscription agreement (ASA). The same shape, an advance payment for shares issued at the next round at a discount or a cap, drafted so that the investor still qualifies for SEIS and EIS income tax relief. HMRC’s conditions are what make it different from a SAFE: the money cannot be refunded, no interest may accrue, the agreement cannot be varied or assigned, and the shares must be issued within six months (the longstop). A plain SAFE fails those tests and so costs a British angel half the tax relief the ASA preserves. Convertible loan notes are also used in the UK, but they are debt and do not qualify for SEIS or EIS at all.
France: the BSA-AIR (bon de souscription d’actions, accord d’investissement rapide), introduced in 2013 as a deliberate French translation of the SAFE, built on a share warrant because French company law needed an existing security to hang the promise on. Germany and the Netherlands mostly use a convertible loan (Wandeldarlehen in Germany), because issuing shares requires a notary and a loan does not, so the debt form survives for procedural rather than commercial reasons.
India uses the iSAFE (published by 100X.VC in 2019) alongside compulsorily convertible debentures and preference shares, which are the instruments Indian company law recognises. Singapore has the CARE (convertible agreement regarding equity), a local adaptation. Brazil’s early rounds run on the mútuo conversível, a convertible loan. Canada and Australia use SAFEs adapted to local law by the leading startup law firms and accelerators. The family resemblance is the point: an early investor everywhere wants to pay now, price later, and be rewarded for the risk with a cap or a discount. What differs is which legal object carries the promise and which tax regime the drafting has to satisfy.
The older American alternative is the KISS, published by 500 Startups in 2014 in a debt version (interest, an eighteen-month maturity) and an equity version, both carrying a cap, a discount and a most favoured nation clause. It is rarely seen now. The convertible note itself remains common for bridge rounds by existing investors, where a maturity date is a feature rather than a bug.
SAFE (Simple Agreement for Future Equity): frequently asked questions
What is a SAFE note?
A SAFE (simple agreement for future equity) is a contract under which an investor pays a startup now and receives preferred shares at the company’s next priced financing round, at a price set by a valuation cap, a discount, or both. It is not a loan: it carries no interest, has no maturity date and is not repayable. Y Combinator published the form in 2013 and the post-money version, now standard, in 2018. "SAFE note" is a common name for it, but the word note is misleading because a note is debt and a SAFE is not.
What is the difference between a pre-money SAFE and a post-money SAFE?
In a post-money SAFE the holder’s ownership is fixed at the amount invested divided by the valuation cap, measured on the company’s capitalisation immediately before the next priced round, so every later SAFE dilutes the founders rather than the earlier SAFE holders. In the original pre-money SAFE the cap was applied to the pre-money capitalisation before any SAFEs converted, so SAFEs diluted each other and the founders together and no holder knew their percentage until the round closed. The post-money form is clearer for investors and more expensive for founders who sign several.
What happens to a SAFE if the company is sold before it converts?
Under the standard form the holder receives the greater of their money back and the amount their cap-implied fraction of the company would be worth in the sale, ranking alongside any preferred stock and ahead of the common. If the company is wound up rather than sold, the holder receives their money back if any remains after creditors, alongside other SAFE holders and preferred stock. Either way the SAFE behaves like a 1x non-participating preferred share for the purposes of the exit.
What is the UK equivalent of a SAFE?
The advance subscription agreement (ASA). It does the same job, an advance payment for shares issued at the next round at a discount or under a cap, but is drafted to meet HMRC’s conditions for SEIS and EIS relief: no interest, no right of refund, no variation, and conversion within six months. A US-form SAFE does not qualify for that relief, which is the whole reason the ASA exists.
Practise it
Take a company from founding through a SAFE and a priced seed round. Set the cap, the pre-money and the option pool, watch the price per share and every holder’s stake move, then check your own arithmetic against the table.
Open Cap Table Builder, free, 15 minWhere SAFE (Simple Agreement for Future Equity) comes up
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