Procedure · Financing
How to raise on SAFEs
A SAFE (Simple Agreement for Future Equity) is a deferred-conversion instrument: the investor wires cash now, the corporation issues a SAFE that converts to preferred stock at the next priced round, and the conversion price is determined by a valuation cap, a discount, or both. SAFEs are the dominant pre-seed and seed instrument in venture-backed startups. They're operationally simple to issue but mechanically complex at the conversion event, especially when multiple SAFEs at different terms stack.
Quick facts
SAFE financing
| When | Pre-seed and seed-stage corporations raising before a priced round |
|---|---|
| Documents produced | Authorizing resolution, executed SAFE, register entry, conversion-modeling tab |
| Conversion event | Next priced equity round (typically Series Seed or Series A) |
| Statutory anchor | Corporation statute (issuance of convertible securities) + securities exemption |
At a glance
- Choose the SAFE form (Y Combinator post-money SAFE is the modern standard) before issuing the first one
- Set valuation cap and discount per the negotiated terms; some SAFEs use one, some use both
- Most-favored-nation (MFN) clauses propagate later, better terms backward to earlier SAFEs
- Multiple SAFEs at different caps create stacked dilution at conversion that must be pre-modeled
- Conversion math under the post-money SAFE form means SAFE dilution is determinable up-front (which is its main advantage over pre-money SAFEs)
On this page
Steps
Choose the SAFE form
Y Combinator publishes the canonical SAFE forms. The current standard is the post-money SAFE, which fixes the SAFE holders' ownership percentage at conversion regardless of how many SAFEs are stacked. The older pre-money SAFE has different dilution properties and is no longer recommended for new issuances. Within the post-money family, the variants are: valuation cap only, discount only, valuation cap with discount, and MFN. Pick the form before issuing the first SAFE; mixing forms in the same raise creates conversion complexity.Set the cap, discount, and any side terms
The valuation cap caps the price at which the SAFE converts (it converts at the lower of the cap price or the round price). The discount provides a percentage discount off the round price. Common combinations: cap-only ($8M cap, no discount), discount-only (20% discount, no cap), or both ($8M cap, 20% discount, whichever produces a lower price). MFN clauses allow the SAFE holder to take more favorable terms granted to a later SAFE investor; these propagate complexity forward.Authorize the issuance
The board passes a resolution authorizing the SAFE issuance: the investor, the principal amount, the cap and discount, and the form of SAFE being signed. Each SAFE is typically authorized by its own resolution, or by a blanket resolution that approves a SAFE-issuance program up to a specified dollar limit. The corporation should also ensure that the existing financing documents (any prior investor rights, ROFR/co-sale, drag-along) permit SAFE issuances without consent.Execute the SAFE and receive the funds
The SAFE is signed by the corporation and the investor. The investor wires the principal amount. The SAFE is dated the date of execution. The cleared funds, the executed SAFE, and the authorizing resolution all go into the minute book. The investor receives a copy of the executed SAFE.Record the SAFE in the register and conversion-model tab
The SAFE is not a share issuance, so it doesn't appear on the share register as issued shares. But it is a convertible security that affects fully-diluted share counts. The corporation's records should include a separate SAFE tab (often in the cap-table software) that tracks each SAFE's investor, principal, cap, discount, MFN status, and conversion-event share count under defined assumptions. This is the diligence-ready record of the SAFE.Track stacking across multiple SAFEs
Most corporations raise multiple SAFEs across a seed campaign. Each SAFE has its own cap and discount. At conversion, each converts at its own terms. Under post-money SAFE math, the cumulative dilution from all SAFEs is computed before the new priced-round investor's price is fixed. A series of SAFEs at caps of $6M, $8M, and $10M will produce different conversion share counts than three SAFEs at $8M each. The corporation should run the full conversion model at each new SAFE issuance to update the expected post-SAFE ownership picture.Convert at the priced round
When the next priced round closes, the SAFEs convert into preferred stock at the price determined by their terms. The SAFE-converted shares are part of the pre-money share count, which means the priced-round investor's per-share price is set after SAFE conversion. The SAFE holders typically convert into the same preferred series as the new investors (less common: a separate "shadow" series with adjusted terms). The conversion is documented in the closing memo and reflected in the post-closing cap table.Update the records post-conversion
After the priced round closes, the SAFE has performed its purpose. The SAFE tab in the records can be archived as a closed item. The converted shares appear on the share register and cap table as preferred stock issued at the closing. The original executed SAFE remains in the minute book as a historical record of the financing event.
Common mistakes
- Mixing pre-money and post-money SAFEs. Corporations that issued SAFEs starting before 2018 and continued into the current era often have a mix of pre-money (older) and post-money (newer) SAFEs. The conversion math is different for each. Mixing them creates a stacking model that must be carefully traced; a corporation that issues a post-money SAFE after pre-money SAFEs effectively dilutes the post-money investors more than they expected unless the math is run explicitly.
- MFN clauses unexpectedly propagating. An early SAFE has an MFN clause. A later SAFE has a better valuation cap. The MFN propagates the better cap backward; the early SAFE is now effectively converting at the better cap. If the corporation didn't model this when issuing the later SAFE, the actual dilution at conversion is larger than expected.
- Side letters with different terms. Investor pushes for a side letter with terms not in the SAFE itself (information rights, pro-rata, board observer). These don't appear on the SAFE but are real obligations. They must be tracked alongside the SAFE in the records.
- Forgetting SAFEs at conversion modeling. A founder runs the dilution math for a Series A but uses the current cap table without converting the SAFEs first. The actual post-Series-A founder ownership is materially lower than the model showed because the SAFEs convert first and then the Series A investor's price is set off the post-SAFE share count.
In Octelligence
SAFEs that convert correctly the first time.
Octelligence tracks each SAFE as a first-class instrument: cap, discount, MFN status, and pre-computed conversion under defined Series A scenarios. The conversion at closing is mechanical, not reconstructive.
See Cap Tables & FinancingFAQ
Common questions
A convertible note is debt: it has interest, a maturity date, and the corporation owes the principal back if it doesn't convert. A SAFE is not debt: no interest, no maturity, no repayment obligation. SAFEs are simpler operationally and have largely replaced convertible notes in seed-stage venture financing in the US. Notes are still common in some markets and for specific structures.
Investor pressure pushes toward cap-only (lowest investor price). Founder pressure pushes toward discount-only (higher implied valuation, since the discount is typically smaller than the cap implies). Cap-with-discount is the negotiated middle ground. The Y Combinator post-money SAFE form supports all three combinations.
Not directly via the SAFE — SAFEs don't typically include governance rights. But side letters alongside the SAFE may grant board observer rights or other governance terms. The SAFE holder's actual governance role appears at conversion, when they become preferred stockholders with the rights attached to the preferred series.
The SAFE remains outstanding. Most SAFEs convert at a defined event (priced round, change of control, liquidation, or dissolution) and have a different conversion mechanic at each. If the corporation goes years without a priced round, the SAFEs stay outstanding as fully-diluted-but-unconverted instruments on the cap table. Some corporations eventually do a "SAFE conversion round" specifically to clean up outstanding SAFEs.
Until you can't make the dilution work without it. Each SAFE adds dilution at conversion. Once cumulative SAFE conversion would dilute founders below their target post-Series-A ownership, the next round needs to be priced (so the corporation can set valuation deliberately). Most corporations transition to priced rounds at a cumulative SAFE raise of $1.5-4M.
Not at issuance — the SAFE is a contractual right, not an equity instrument. Tax events typically happen at conversion, when the SAFE becomes preferred stock, and at exit, when the stock is sold. The conversion mechanics for tax purposes vary; SAFE investors typically consult their tax advisors on whether QSBS treatment applies and when the 5-year QSBS holding period begins.
SAFEs without the conversion surprises
Raise on SAFEs that the cap table actually models.
Each SAFE as a first-class instrument, MFN tracking, and pre-modeled conversion under multiple Series A scenarios. Closing is then mechanical.