SAFE notes and the post-money SAFE

A SAFE, short for Simple Agreement for Future Equity, is the document behind most pre-seed and seed checks written to Palo Alto startups. An investor wires money today. The company issues no shares yet. The investor gets shares later, usually when the company raises its first priced round of preferred stock. There is no interest rate, no maturity date and no board seat.

Y Combinator says its partner Carolynn Levy created the SAFE in 2013. In September 2018 YC replaced the original with the post-money SAFE, which is the version this page explains. This page is general information, not legal, tax or financial advice. The examples are simplified. Your own SAFE controls, so read it with a startup lawyer before you sign or send one.

How a SAFE works in plain English

Think of a SAFE as a prepaid ticket to the next round. The investor pays the face amount, called the Purchase Amount. Both sides agree on one or two pricing terms. When a priced round closes, the SAFE converts into preferred stock at a price set by those terms. YC's documents page puts it simply: the SAFE "converts into shares automatically when your startup raises a priced round."

Three outcomes are possible:

1. Priced round. The SAFE converts into the same kind of preferred stock new investors buy, at the SAFE's own price.
2. Sale or IPO before a priced round. YC's user guide says the holder receives "the greater of (1) a return of its Purchase Amount or (2) the as-converted proceeds."
3. Dissolution. The holder is paid back its Purchase Amount to the extent funds remain. YC's guide describes the SAFE as junior to creditors, on par with standard non-participating preferred stock and senior to common stock.

What makes the post-money SAFE different

The original 2013 SAFE used a pre-money valuation cap. The cap was measured before counting the SAFE money. When founders raised several SAFEs, each new one diluted the others. The ownership sold was hard to calculate until the priced round arrived. Founders often found they had sold more of the company than they thought.

The post-money SAFE fixes the math in place. YC's guide states that "the Safe Price equals the Post-Money Valuation Cap divided by the Company Capitalization." Company Capitalization includes:

• All issued and outstanding shares.
• All converting securities, including every SAFE and note.
• Issued and promised options plus the existing unissued option pool.

It leaves out any increase to the option pool made as part of the priced round, except where needed to cover promised options that exceed the pool. The practical result is that the investor's percentage equals the Purchase Amount divided by the post-money cap. YC's guide adds one more rule founders should remember: "the safes will be diluted by the new money raised in the Equity Financing." SAFEs do not dilute each other, but they all share dilution from the priced round.

Worked example: two SAFEs and a Series A

The numbers below are hypothetical, chosen to make the math easy to follow. A company has 8,000,000 founder shares and a 1,000,000 share option pool, for 9,000,000 shares in total. It raises two post-money SAFEs with a $10 million cap: $1,000,000 from a seed fund and $500,000 from an angel. Later it raises a $5,000,000 Series A at a $20,000,000 pre-money valuation. For simplicity the Series A adds no new option pool.

How the numbers fall out:

• The two SAFEs together buy 15 percent ($1.5 million divided by the $10 million cap). Solving for 15 percent of the enlarged count gives 1,588,236 SAFE shares and a Company Capitalization of about 10,588,235 shares.
• The Safe Price is $10,000,000 divided by 10,588,235, or about $0.944 per share.
• The Series A price is the $20 million pre-money valuation divided by the same 10,588,235 shares, or about $1.889 per share. The SAFE holders pay half what the Series A investors pay, which is their reward for investing earlier.
• The Series A takes 20 percent. Every earlier holder shrinks by the same fifth. The 10 percent SAFE becomes 8 percent.

Rounding makes the total differ by one share. Real conversions use the exact definitions in the signed SAFE and the Series A charter, so ask counsel to run the final numbers.

The YC forms and what each one does

For U.S. companies, YC's documents page lists these post-money forms:

YC's guide says Version 1.1 in 2021 dropped the combined cap and discount form from the website. It also says Version 1.2 in February 2023 stopped side letters that deal only with non-economic rights from triggering the MFN clause. Under the MFN form the holder may amend its SAFE to match later SAFEs with better terms. It takes the later terms as a package and cannot pick the best clause from each.

The pro rata side letter changed in the post-money version. YC's guide says the right now applies to the round in which the SAFE converts, so a SAFE that converts in a Series A carries a right to buy into that Series A. Our pro rata rights guide explains why lead investors watch these letters closely.

YC also publishes versions for companies in Canada, the Cayman Islands and Singapore. It tells founders to consult a lawyer licensed in the relevant country before using them.

SAFE or convertible note?

A convertible note does the same job but is debt. It carries interest and a maturity date. In theory the investor can ask for repayment when the note comes due. A SAFE has neither, which is why many Peninsula angels and seed funds accept it without much discussion. Some investors, especially outside Silicon Valley, still prefer notes for the legal standing a debt instrument gives them. Our convertible notes guide compares the two in more detail.

A SAFE is still a security. Companies usually rely on a private offering exemption to sell it, file a federal Form D after the first sale and make any state notice filings. Buyers generally need to be accredited investors. Our angel investors guide explains the accredited investor tests.

What Palo Alto founders typically ask

How many SAFEs is too many?

There is no fixed limit, but each one adds to the stack that converts at the Series A. The post-money structure means every SAFE dilutes the founders directly. Keep a running model that shows founder ownership after each SAFE and after a plausible priced round.

Should every SAFE have the same cap?

Not necessarily. Many companies raise on rising caps as they hit milestones. That is fine as long as early investors understand it and any MFN holders get notice of the better terms they could claim.

What happens if our Series A price is below the cap?

A cap-only SAFE converts at the lower price, so the investor simply pays the Series A price. YC's guide also warns that caps "are just that -- caps, rather than final valuations." If the Series A valuation lands close to the cap, SAFE holders can end up with more ownership than a quick estimate suggested.

Do we need a lawyer for a standard SAFE?

Many founders fill in the YC form themselves for small checks. A lawyer still helps confirm board approval, securities filings and that the cap table reflects every SAFE. Our startup law firms guide lists counsel with Palo Alto and Peninsula offices, including Cooley on Hanover Street.

A checklist before you sign a SAFE

1. Download the current form from YC instead of reusing an old copy from another company.
2. Confirm whether the cap is post-money. Older templates still circulate.
3. Get board approval for the issuance and keep the signed copy in your records.
4. Record the SAFE on your cap table the day the money arrives.
5. Track every side letter, especially pro rata letters and MFN notices.
6. Ask your lawyer about the federal and California securities filings for the sale.

Frequently asked questions