SAFE

What is a SAFE?

A SAFE (simple agreement for future equity) is an investment that converts into shares at a later priced round. The investor holds no shares until a triggering event, such as an equity round or a sale of the company. Y Combinator introduced the SAFE in late 2013 and released a post-money version in 2018. Unlike a convertible note, a SAFE carries no interest rate or maturity date.

Why it matters to a revenue leader

SAFEs let a company raise money quickly without setting a price, which is why they are common at the earliest stages. The catch is that several SAFEs can convert at once at the next priced round, and the resulting dilution lands on founders and option holders. A revenue leader weighing an equity offer at an early company should ask how much money is outstanding on SAFEs, because it will turn into shares at the next round.

A company raises $1.5 million on post-money SAFEs with a $15 million valuation cap, so the SAFE holders are set to own 10% of the company before any Series A money. When the Series A prices, the SAFE shares are issued first and the new investors buy their stake on top, diluting everyone. Founders and option holders absorb both rounds of dilution.