SAFE

What a SAFE is, and what it is not

A SAFE is an agreement between an investor and a corporation. The investor pays cash. The corporation promises that, at the next priced equity round, the investor will receive shares (typically of the same class issued in the priced round) calculated by reference to terms fixed in the SAFE itself. The SAFE is not a loan: there is no principal balance to repay, no interest, and no maturity date. The investor's only contractual right to the cash is through conversion to equity (or, on a sale or dissolution before conversion, a 1x payout).

Compared with a convertible note, a SAFE is shorter (the standard form is five pages), faster to negotiate, and cheaper to execute. The cost is that the SAFE investor gives up the protections that a debt instrument carries: no interest accrual, no maturity-date trigger that forces conversion, no creditor-priority claim in insolvency.

Pre-money SAFE vs. post-money SAFE

The 2013 SAFE was a pre-money instrument: the investor's ownership percentage was determined at conversion by reference to the pre-money capitalization of the corporation. If the corporation issued additional SAFEs between the first SAFE and the priced round, the new SAFEs diluted the earlier SAFE holders alongside the founders. Modeling the eventual ownership was difficult, and founders frequently underestimated how much they had given up.

The 2018 SAFE solved the modeling problem by making the instrument post-money: each SAFE locks in a fixed percentage of the post-money cap at the moment of investment. Later SAFEs dilute the founders, not the earlier SAFE holders. The trade-off is that the post-money form is less founder-friendly: founders typically give up more total ownership than they realize until they see the conversion math at the priced round. The post-money SAFE is the current standard.

How a SAFE converts

At the next priced equity round, the SAFE converts into shares of the same series being issued at the round. The number of shares is calculated by reference to the lower of:

• The valuation cap. If the priced round occurs at a valuation above the cap, the SAFE investor converts as if the round had occurred at the cap, receiving more shares per dollar invested than the new priced-round investors.
• The discount rate. If the priced round occurs at or below the cap, the SAFE investor receives a discount (commonly 10 to 25 percent) off the priced-round price per share.

Most SAFEs include both a cap and a discount, with the investor receiving whichever conversion is more favourable. Some SAFEs include neither, relying on a most-favoured-nation clause (MFN) under which the SAFE is amended to match any more favourable terms granted on later SAFEs.

What founders should track

Each SAFE on the cap table needs:

• The principal amount and the date of investment
• Whether it is the pre-money or post-money form
• The valuation cap and discount rate, if any
• Pro-rata rights, if granted (often through a separate side letter)
• For post-money SAFEs, the investor's locked-in fully diluted percentage at issuance

When the priced round arrives, all outstanding SAFEs convert simultaneously, typically before the new money is priced in. The math compounds quickly when several SAFEs are outstanding with different caps and discounts, which is why batch SAFE conversion is one of the operations most likely to introduce errors in a hand-maintained cap table.