The SAFE
Cash now, shares at the next priced round: the post-money SAFE, on Northwind's $250,000.
A SAFE — simple agreement for future equity — is cash now for shares at the next priced round. It has no interest and no maturity. Since 2018, YC's standard is the post-money SAFE, where the cap is stated as a post-money valuation and the investor's ownership is simply investment ÷ cap.
If the company is sold before a priced round, the SAFE does not vanish. The investor takes the greater of its money back or what its shares would get as converted at the cap; the SAFE says it operates like standard non-participating preferred.
SAFE
- Good at
- One short standard document
- Close with each investor as soon as they wire
- No interest, no maturity date
- Watch for
- Dilution lands at the next round, on top of that round's own
- Usually a liability on the balance sheet until it converts
- A stack of SAFEs at different caps is easy to under-model
- Best for
- Pre-seed and seed money from several investors, closed one at a time
In this lesson: the post-money SAFE's arithmetic, and the MFN and pro rata side letters.
Pages in this page
2 pages go deeper, about 11 minutes in all. Read them in order, or open the one you need.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- Background reading — not an authority
- Y Combinator, SAFE financing documents (opens in a new tab)The post-money SAFE: cap only, discount only, or MFNFree to read
- Y Combinator, Post-Money SAFE (Valuation Cap, no Discount), §1(d) (opens in a new tab)A sale before the round: the SAFE's money back, or its as-converted shareFree to read
- Wikipedia, “Simple agreement for future equity” (opens in a new tab)The SAFE — backgroundFree to read
The words this page teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- SAFECash from an investor in exchange for a right to shares in a future priced round, usually at a valuation cap or a discount. Not debt and not yet stock; because a SAFE can require cash on a change of control, it is often classified as a liability under ASC 480 and remeasured at fair value — the terms decide
- Valuation capThe highest valuation a SAFE or note converts at. On YC's post-money SAFE the Safe Price is the cap ÷ Company Capitalization, and the holder takes whichever of that or the round price issues more shares
- Post-money valuationPre-money valuation plus the new money. An investor's ownership is its investment ÷ post-money; a post-money SAFE's cap is stated this way, so the SAFE's ownership is known the day it is signed
See also
- 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.
- SAFEA simple agreement for future equity. An investor pays now, and the SAFE converts into shares at your next priced round, usually at a valuation cap, a discount, or both. It carries no interest and no maturity date.