The short answer
A SAFE (simple agreement for future equity) is a contract where an investor gives your startup money now in exchange for the right to shares later. It isn't debt and isn't stock yet: it converts into preferred shares automatically when you raise a priced round, usually at a valuation cap, a discount, or both.
- A SAFE is not a loan: no interest, no maturity date.
- It converts into preferred stock at your next priced round.
- The valuation cap is usually the main term you negotiate.
- On a post-money SAFE, ownership sold = investment ÷ post-money cap.
- Y Combinator has published the post-money SAFE as its standard since 2018.
How it works
An investor wires money and signs a short document. Nothing is priced yet. When you later raise a priced round (often a seed or Series A), the SAFE converts into the same kind of preferred stock the new investors buy, at a price set by its terms: a valuation cap, a discount, or a "most favored nation" clause. Y Combinator, which created the SAFE, says the post-money version has been its standard since 2018, and its current US forms come in three versions: cap with no discount, discount with no cap, and uncapped MFN.
Worked example (hypothetical)
You raise $750,000 on post-money SAFEs with a $7.5M valuation cap. On a post-money SAFE, the ownership you've sold is the investment divided by the cap: $750,000 ÷ $7,500,000 = 10%. If a later priced round values the company above the cap, these investors convert at the cap and keep roughly that 10% going into the round (before the new money dilutes everyone).
Before you send a SAFE
- Decide which version you're offering: cap only, discount only, or uncapped MFN.
- Decide whether you'll sign a pro rata side letter, and for which check sizes.
- Add every SAFE to a running cap table so you always know the total ownership sold.
- Have a startup lawyer look over the documents, especially if you change any standard wording.
Why it matters to a pre-seed founder
SAFEs are fast and cheap to sign, which helps when you're raising in small checks from angels and local investors over several months. The catch: dilution is easy to forget. Several SAFEs on different caps add up, and they all land at once when you price a round. Keep a simple cap table that shows what each SAFE converts into. Our SAFE vs priced round guide walks through the math.
Frequently asked questions
Is a SAFE debt?
No. Y Combinator describes a SAFE as neither debt nor a loan: it has no interest and no maturity date, but it isn't stock until it converts.
When does a SAFE convert?
Automatically when the company raises a priced equity round, into the preferred stock sold in that round.
Do SAFEs include pro rata rights?
Not in the standard YC SAFE itself. Pro rata rights go in an optional, standardized side letter.