What it means
A SAFE, short for simple agreement for future equity, is a contract where an investor gives you money now in exchange for shares later. Y Combinator published the standard form, and it's now the most common way to raise early money in the US.
No share price is set when you sign. The SAFE converts into shares at your next priced round, usually at a lower price than the new investors pay, set by a valuation cap, a discount, or both. It carries no interest and has no maturity date, which is what separates it from a convertible note.
With a post-money SAFE, the investor's ownership at conversion is the investment divided by the post-money valuation cap, measured before the new round's own dilution. You can work out what you've given up on the day you sign. Each additional SAFE dilutes the founders and other shareholders, and leaves earlier post-money SAFE holders' percentages alone. So does most of an option pool increase made at the priced round.
If the company is sold before a priced round, the holder gets the greater of their money back or what the shares at the cap would receive. In a wind-down, SAFE holders are paid back before common stockholders, as far as the money goes.
In the books, the cash comes in and a SAFE balance goes on the balance sheet. Under GAAP, post-money SAFEs are often classified as liabilities, so agree the treatment and any fair value remeasurement with your CPA before the first audit. At the priced round, the SAFE converts into preferred stock and comes off the books.
An investor wires Acme $500,000 on a post-money SAFE with a $10 million cap, which is 5% of the company before the Series A. Acme then signs a second SAFE on the same terms for another 5%. Together they hold 10%, and that 10% comes out of the founders' share. If the Series A prices the company above the cap, both convert at the cap's lower price per share.
Keep every SAFE on the cap table, modeled as converted, before signing the next one. The priced round is when they become real shares.
Why it matters. On a post-money SAFE, the investor's ownership is the investment divided by the cap, so you can work out dilution the day you sign. Stack several and the dilution adds up before your Series A starts.
Try it with your numbers
Change any number. The working below updates as you type.
Ownership = Investment ÷ Post-money cap · Price = lowest of cap, discount and round price0 for a SAFE with no cap.
They convert alongside this one.
0 for a cap-only SAFE.
Ownership bought, before the new round's dilution
5.00%
How it’s worked out
- 1Ownership bought at the cap$500,000.00 ÷ $10,000,000.005.00%
- 2All SAFE money under this cap$500,000.00 + $500,000.00$1,000,000.00
- 3Company capitalization, SAFEs included9,000,000 ÷ (1 − $1,000,000.00 ÷ $10,000,000.00)10,000,000 shares
- 4Cap price$10,000,000.00 ÷ 10,000,000 shares$1.0000
- 5Discount price$2.0000 × (1 − 20.00%)$1.6000
- 6Shares at the valuation cap$500,000.00 ÷ $1.0000, rounded down500,000
- 7Shares at the discount$500,000.00 ÷ $1.6000, rounded down312,500
- 8Shares at the round price$500,000.00 ÷ $2.0000, rounded down250,000
- 9Converts atThe lowest price, which issues the most sharesValuation cap: 500,000 shares
| Path | Price per share | Shares |
|---|---|---|
| Valuation cap (applies) | $1.0000 | 500,000 |
| Discount | $1.6000 | 312,500 |
| Round price | $2.0000 | 250,000 |
Assumes every other SAFE converts at the same post-money cap. Prices are shown to four decimals; share counts use the exact price and drop fractions. YC's current standard post-money forms are cap-only, discount-only or uncapped MFN; a SAFE with both a cap and a discount is a modified form, so read its own conversion terms.
The entry, worked
An investor wires Acme $500,000 on a post-money SAFE with a valuation cap.
| Account | Debit | Credit |
|---|---|---|
| Cash | $500,000.00 | |
| SAFEs outstanding | $500,000.00 | |
| Total | $500,000.00 | $500,000.00 |
Under GAAP, post-money SAFEs are often classified as liabilities, so agree the account's classification and any fair value remeasurement with your CPA before the first audit.
Common questions
Is a SAFE debt?
Legally it's not a loan: there's no interest and no maturity date. For GAAP accounting, post-money SAFEs are often classified as liabilities rather than equity because they can settle in a variable number of shares. Get your CPA's view before your first audit.
How much of the company does a post-money SAFE buy?
Roughly the investment divided by the post-money valuation cap. A $500,000 SAFE at a $10 million post-money cap converts into about 5% of the company, before the new round's own dilution.
What happens if we're acquired before a priced round?
Under YC's post-money SAFE, the holder chooses the better of two: the purchase amount back in cash, or the proceeds of converting into common at the cap. A $500,000 SAFE at a $10 million cap in a $40 million sale takes about 5%, roughly $2 million.
Where it comes up
The glossary entries, founder guides and lessons on this site that use the term and link here.
- EquityThe residual interest in the assets that remains after deducting liabilities (FASB CON 8 ¶E61)Glossary
- How to account for SAFEs on your balance sheetA SAFE is cash today and shares later. Why it usually sits with liabilities, how the cap and discount set conversion, and what to book at the priced round.Guide · 4 min
- Audit-ready books before your Series AInvestors, lenders and auditors ask for the same things: accrual statements, reconciled accounts and support for every balance. How to be ready first.Guide · 4 min
- Balance sheet explained for startupsAssets equal liabilities plus equity. What each startup line means, from deferred revenue to the SAFE and the accumulated deficit, and why it must balance.Guide · 7 min
- Cash flow statement explained: why profit isn’t cashHow the cash flow statement starts at net income, adds back non-cash costs and working capital, splits three activities and ties to the balance sheet.Guide · 5 min
- General ledger and double-entry bookkeeping, explainedHow double entry works: journal entries, debits and credits, normal balances, running balances, the trial balance, and why posted entries are reversed.Guide · 6 min
- Chart of accounts for startups: a starting templateA starting chart of accounts for a US startup: number ranges, the expense accounts you need, and when to add an account versus a class or tracking tag.Guide · 6 min
- The accounting equationAssets = liabilities + equity is not a formula you apply at period end. It is true after every single entry, and that is what makes the books provable.Lesson 2
- Accounts, and the five typesEvery account belongs to exactly one of five types, and its type decides which side increases it. Get the type right and the entry writes itself.Lesson 3
- The balance sheetThe other three account types, at one instant — and the single line where the month's profit lands, which is what ties the two statements together.Lesson 11
Read further
General information for US companies, not tax, legal or accounting advice. Check the specifics with a CPA before you act on them.