SAFE notes explained: how a SAFE works, converts and what it risks

A SAFE is the paperwork a founder most often meets first when an investor offers money before there is a priced round. This page covers the terms of the standard Y Combinator forms, the arithmetic that turns a valuation cap into a percentage, what happens at each trigger, and where the instrument can hurt either side. It belongs to the fundraising mechanics section, it describes United States practice, and it is education, not legal or tax advice.

What a SAFE note is

A SAFE is an agreement in which the company promises the investor a future ownership interest if certain triggering events occur, such as a future equity financing or an acquisition of the company⁵. Until a trigger occurs the investor owns no part of the company⁵. Unlike a convertible note, a SAFE generally does not put a valuation on the equity when it is issued, deferring that calculation until the triggering event⁵.

The label misleads. Despite the common phrase “SAFE note,” the instrument is not a loan, and it is not stock until it converts into preferred shares in an equity financing¹. Y Combinator introduced the original version in late 2013 as a replacement for convertible notes in early fundraising². In 2018 it moved to a post-money version, treating SAFE-based financings as independent seed rounds capable of providing multi-year runways, rather than short bridges to a priced round². That post-money form has been the standard since 2018¹.

Founders and investors usually have one item left to negotiate: the valuation cap². That is the main reason the SAFE spread. A company can close with one investor as soon as both sides sign and the money arrives, without lining up a single close for everyone, and without paying lawyers to draft a long set of terms².

How a SAFE works, from signing to shares

The mechanics are short enough to list.

1. Agree two numbers. The investor and the company settle on the amount invested and the valuation cap, then both date and sign the SAFE².
2. The money arrives. A SAFE is not binding until the money is received, so an unfunded SAFE never takes effect¹.
3. Nothing happens, technically. The SAFE sits outstanding until a priced round, a sale of the company or a dissolution occurs². Y Combinator strongly recommends keeping an accurate cap table that tracks how each SAFE will convert².
4. A priced round converts it. When the company sells preferred stock in an equity financing, every outstanding SAFE converts automatically and then terminates, with no minimum amount that the round must raise¹.
5. The holder becomes a stockholder. The SAFE is designed to turn its holder into a stockholder, and it ends once it has paid out in stock, cash or other proceeds².

Behind step 4 sits a board decision. The company’s board of directors must formally consent to issuing SAFEs, at a meeting or in writing, before any are issued². The standard forms also restrict transfer: the investor cannot pass a SAFE to anyone but an affiliate without the issuing company’s consent¹.

SAFE terms, defined

Six terms carry almost all of the meaning in a standard SAFE. The table gives each one in plain words, with the arithmetic that follows from it.

Two of these deserve a closer look. A SAFE can carry a cap and a discount at once, and then whichever calculation is most advantageous to the investor applies². A discount works like this: the Discount Rate is 100 minus the discount percent, so a 20% discount means a Discount Rate of 80%². The MFN has a timing rule: the date it uses is the later of signing the SAFE or receiving the wire¹. An MFN holder gets one chance to adopt later terms, and it cannot cherry-pick: if it converts to a later SAFE’s terms, the amended SAFE is identical to that later one².

The valuation cap and how much ownership it sells

The cap is the number everyone argues about, and on a post-money SAFE it translates directly into a percentage. The rule is a division: ownership sold equals the investment divided by the post-money cap¹.

Pick the fundraise amount and the valuation cap follows

Y Combinator’s own example starts from a target. A founder aiming to raise $1 million and sell 15% sets a post-money cap of about $6.7 million, because $1 million ÷ 15% is about $6.7 million². Raise less on the same cap and you sell less: $500k on a $6.7M cap is about 7.5%, and $1M is about 15%¹.

Pre-money and post-money, side by side

Pre-money and post-money are two ways to describe one valuation at two moments. A pre-money valuation is the valuation immediately before the company receives the investment². A company raising $2 million at a $10 million pre-money valuation is generally raising at $12 million post-money².

Several caps add up

Caps add up, which is the point of the post-money design. Five $100k SAFEs at a $5M cap sell 10% of the company, not 2%³. A company that raises on different caps simply sums the percentages. Y Combinator’s two-cap example: $500k on a $5.5 million cap sells about 9%, $500k on an $8.3 million cap sells about 6%, and together they sell about 15%².

The ceiling on a post-money SAFE

The same division sets a hard limit. Raising more than the post-money cap would result in negative ownership for founders². The guide’s own table makes the point at a $5 million cap: raising $2.5 million sells 50% and leaves founders 50%². Long before that ceiling, founders have to weigh the next round’s dilution, because SAFE ownership is measured before the new money arrives.

A SAFE note example, step by step

Here is the full path with round numbers. Harbor is our made-up company, owned entirely by its founders. It signs two SAFEs with different caps. The first is for $200,000 on a $4,000,000 post-money cap, the second for $400,000 on an $8,000,000 cap. We apply the division rule from¹ to each.

Worked example (our arithmetic): Harbor’s two SAFEs (ownership rule from¹)

Some time later Harbor raises a priced Series A, and new investors buy 20% of the company after closing. For a clean illustration we assume no option pool change and no pro rata rights. The SAFEs convert into preferred stock, and because they are measured before the new money, every holder is diluted by the new round: the safes are not diluted by each other, but they are diluted by the money raised in the equity financing².

Worked example (our arithmetic): Harbor after the Series A. Every holder shrinks by the 20% the new investors take, so each after-round figure is the old figure × 0.80 (dilution rule from²). The new investors hold the rest.

A real conversion is messier, because the cap table also counts the options and the unissued pool that exist before the round, and it leaves out any pool increase adopted as part of the round². Y Combinator’s own worked example adds up the dilution from SAFEs, new hires’ options and the Series A: safe dilution of 15% × (100% − 39.41%) = 9.09% in its illustration². The full formulas live in the cap table section of the User Guide².

Why the cap sometimes does not apply

The cap is a ceiling on the conversion price, not a promise of a price. The SAFE holder’s ownership will be the greater of what the cap implies and what the investment buys at the price new investors pay². A cap is a ceiling on the price, not a final valuation². When the round values the company well above the cap, the cap applies. When the round’s valuation is close to or below the cap, the holder converts at the new investors’ price and can end up with more shares than the cap-based estimate predicted². Founders then take more dilution than they estimated².

What is a trigger event for a SAFE: priced round, sale or shutdown

The SEC investor bulletin of May 9, 2017 explains why triggers matter: a SAFE gives the investor a future equity stake only if a triggering event occurs⁴.

A SAFE has three trigger events, and each one pays differently. The table covers the standard valuation cap form.

In a liquidity or dissolution event the SAFE functions like standard non-participating preferred stock: it ranks junior to outstanding debt, including convertible notes, on par with other SAFE holders and preferred stockholders, and senior to common stockholders². The SAFE is designed to end only once the holder has received stock, cash or other proceeds².

That design has a gap the SEC flagged. A SAFE may never trigger. If the company earns enough that it never again needs to raise capital, and is never acquired, the SAFE may never convert⁴. And a SAFE that triggers on an offering of preferred stock does not convert if the company later raises money by selling more SAFEs, common stock or convertible notes, or by taking a conventional bank loan⁴. In both cases the investor can be left holding nothing despite the company having raised more capital⁴.

SAFE vs convertible note

Both instruments convert into equity later, so the difference is what they are before they convert. A convertible note is a loan made by an investor to a company that can be converted into a different security⁵; the SEC’s startup securities primer draws the same line. It accrues interest and carries a maturity date set for repayment or forced conversion¹. A SAFE has neither¹.

The seniority row has a trap. A convertible note is debt, and debt is senior to equity, including convertible equity like a SAFE³. Issue a note before or after a SAFE and the SAFE investors automatically sit behind it in line³. That is why mixing the two is generally not advisable: they are treated differently in a liquidation or dissolution event². A company that already has many notes outstanding usually stays on notes for simplicity².

Pre-money and post-money SAFEs

Y Combinator replaced the original pre-money SAFE with a post-money version in 2018². The change answers one question that the original could not: how much of the company a given investment buys². Under the original, the answer depended on how much was raised on other SAFEs and on a hypothetical option pool increase negotiated years later². With a post-money SAFE, calculating dilution and ownership takes little more than addition and division².

The two versions also count different things when they convert. The post-money form includes other SAFEs and convertible notes in the capitalization and excludes the option pool increase from the round; the original excluded the SAFEs and included the pool increase². Mixing the two forms creates cap table uncertainty, and the company then has to model every conversion². Y Combinator treats pre-money SAFEs as legacy³.

Side letters, add-ons and amendments

The standard SAFE stays unmodified, and agreed extras go in a separate side letter¹. The standard one is the pro rata letter, which gives the holder the right to invest in the priced round that converts the SAFE². It works with SAFEs that have a post-money valuation cap, because the holder’s share is computed from the cap².

Pro rata rights cost the founders dilution later. The company must make room in the equity financing for its new investors, for its existing investors with pro rata rights and perhaps for others². Y Combinator’s formula for the extra ownership: with new investors targeting 25%, and SAFEs holding 15% as converted, the safe pro rata allocation is 25% ÷ (100% − 15%) − 25% = 4.41%².

Other changes are simple. An investor who wants to put in more money gets a separate new SAFE on the same terms, which leaves the first one intact¹. A SAFE can be amended with the written consent of the company and the investor, or of the company and a majority-in-interest of all outstanding SAFEs with the same terms, and nobody’s purchase amount changes without that investor’s consent². A SAFE signed but never funded does nothing¹.

What are the risks of SAFE notes?

The risks differ by side of the table.

For the investor. The SEC’s bulletin of May 9, 2017 was written about crowdfunding, but its list applies to any holder⁴. Despite its name, a SAFE may not be “simple” or “safe”⁴. The most important point is that the holder is not getting an equity stake in return⁴. SAFEs do not represent current equity stakes in the company, so they do not carry voting rights like common stock⁴. The bulletin names conversion terms, repurchase rights, dissolution rights and voting rights as the items to read⁴. On repurchase, the question is whether a provision lets the company repurchase the holder’s future right to equity instead of letting it convert⁴. The SEC adds that terms vary: there is nothing standard or simple about a SAFE, from the triggering events to the conversion price⁴. Y Combinator’s forms are standardized, but that standardization holds only while nobody edits them, which is why the form itself carries a statement that it is unmodified².

For the founder. Three risks are arithmetic. Caps add up, so the running total of ownership sold has to be tracked before the next SAFE is signed³. The estimate can be wrong in the founder’s disfavor when the priced round does not sufficiently exceed the cap². And an MFN signed first picks up a lower cap issued later, so sequence matters³. Two risks are legal. SAFE investors should be accredited, and if an investor is not accredited at the time of the equity financing, the company can rescind the SAFE by returning the money¹. Pro rata letters can leave less room in the round than founders expected².

For the accounts. Y Combinator intends the SAFE to be an equity security, and says the tax characterization is a question for a tax adviser². Financial statements can go the other way, as the next section shows.

How companies account for SAFEs

SAFEs sit awkwardly between debt and equity, and public filings show it. Ventyx Biosciences accounted for its SAFEs as a liability under ASC 480, “Distinguishing Liabilities from Equity”, stated at fair value based on Level 3 inputs⁷. In its annual report the company judged one SAFE not to be legal-form debt, but the SAFE allowed redemption on events outside the company’s control⁷. The SAFE was measured at fair value at issuance and each reporting period, with changes in fair value in the statement of operations⁷. Upon dissolution, the holders could have received cash equal to the purchase amount⁷. That SAFE later converted into 555,297 shares of A-1 Convertible Preferred Stock, issued in February 2021⁷.

Mobix Labs reached the same classification for its own SAFEs. They required cash settlement in some circumstances, such as a liquidation or dissolution, and the company recorded them as liabilities at fair value, then remeasured at each reporting date⁸. Both are single-company judgments about specific terms, not a rule for every SAFE, but they explain why a founder whose SAFE is described as equity in the term documents may still see a liability line in the audited accounts.

Who can invest and how the sale is regulated

Selling a SAFE is selling a security. A company must either register the offering or fit it within an exemption, and a SAFE is no different from a priced round on that point⁹. The most commonly used route is Regulation D, selling to accredited investors⁹. Most angel investors are accredited⁹.

Two Regulation D routes matter. Under Rule 506(b), there may be no more than 35 purchasers in any 90-calendar-day period, and each purchaser who is not accredited must, alone or with a purchaser representative, have the knowledge and experience to evaluate the merits and risks⁶. Under Rule 506(c), all purchasers must be accredited investors⁶. The company must also take reasonable steps to verify that they are⁶. The full text of Rule 506 sets the conditions⁶. Y Combinator’s guidance is that SAFE investors should be accredited¹.

Questions the paperwork has to answer

Before a SAFE is signed, the form on the table should answer these, and the forms from Y Combinator already answer most of them.

• Which version is it: valuation cap, discount, or MFN with neither¹?
• Is the cap stated before or after the investment, so what ownership does the amount buy²?
• What happens in a sale, an IPO or a shutdown¹?
• Does the investor get a pro rata side letter, and on what minimum investment²?
• Is any other debt or SAFE outstanding that ranks ahead or changes the cap table^{2, 3}?
• Has the board approved the issuance, and is the investor accredited¹?

Round structure, the Series A paperwork and the exits that end a SAFE are covered in how venture rounds work. Options that dilute the same cap table are covered in startup stock options.