I have been talking about this a lot with startup founders lately, especially those raising early-stage capital, so here’s a primer on SAFEs—what they are, how they work, and the different types founders should be aware of. If you’re raising money from angel investors, friends and family, or even institutional seed funds, this is stuff you should know.

So, what is a SAFE?

A SAFE stands for Simple Agreement for Future Equity. It’s not equity now—meaning the investor doesn’t actually own a piece of your company at the time they write you a check—but rather a promise to convert into equity in the future, typically during your first priced equity round (think Series Seed or Series A).

The idea behind SAFEs is to keep early-stage fundraising simple. You avoid the valuation debates that often drag out early fundraising efforts and instead focus on building your product and business.

Here’s how it works in broad strokes:

• Investor gives you money now.
• In return, they get the right to receive preferred stock in the future when you do your first priced round.
• You don’t have to figure out how many shares that investor gets until that future round is priced (i.e. when you know your post-money valuation and price per share).
• But, the SAFE investor is guaranteed either a discount on the price per share relative to the other future preferred stock investors in the priced round (a Discount SAFE - usually a 20% discount) or something called a valuation cap, which guarantees that they will convert at a certain valuation (hopefully for the investor lower than the ultimate priced round valuation), which means they could conceivably receive an effective discount greater than 20%. More on this later, but the basics are that they receive a promise to receive a little better deal than the priced round preferred stock investors because the SAFE investor is coming in earlier with higher risk.

And for the finance nerds in the room: SAFEs are technically convertible instruments, not debt. So they don’t accrue interest, don’t have a maturity date, and (usually) don’t need to be repaid.

Do SAFEs show up on the cap table?

Not yet. Because they’re not equity, they’re typically shown in a separate section at the bottom of the cap table as “convertible securities” or similar. But you still want to keep close tabs on them—they will dilute you when they convert.

Pro tip: Model out a few conversion scenarios based on potential priced round valuations to understand how much of your company you’re really giving away. It’s easy to overlook how much dilution comes from stacking multiple SAFEs, especially with low valuation caps.

The YC SAFE Forms and Why They Matter

Y Combinator created the original SAFE forms, and they’ve since become the industry standard. Using the YC SAFE forms can help streamline negotiations with investors—everyone’s on the same page, and the documents are well understood in the startup ecosystem.

That said, the YC forms are generally neutral between the investor and founder (some might argue they are a little investor friendly). If you want to tweak the terms to be more founder-friendly (which is totally fair), just know that you’ll have to remove the “standard YC form” language. And sometimes that creates friction with investors who are expecting a plug-and-play YC template. So there are tradeoffs in sticking with or diverging from the YC SAFE forms.

The 3 Main Types of SAFEs:

There are three common SAFE structures. Understanding the differences matters a lot when you’re fundraising.

1. Discount-Only SAFE

This is the most straightforward SAFE structure and generally the most founder-friendly.

Here’s how it works:

• The SAFE includes a discount, usually 20%.
• When the priced round happens, the SAFE converts at a price per share that’s 20% lower than what new investors are paying.

Example:

If your priced round values your company at $10M post-money, and investors are paying $1.00/share, the SAFE investor gets to convert at $0.80/share (a 20% discount).

Why founders like it:

• Simple to explain and model.
• Avoids debates over what the current valuation “should be.”
• Great for friends and family rounds where you don’t want to negotiate a valuation cap.

You might even sweeten the discount (say, 25%) for early believers. But keep in mind that experienced investors often push back here—they’ll usually want a valuation cap (more on that next).

2. Valuation Cap-Only SAFE

A valuation cap SAFE sets a maximum valuation at which the SAFE converts. This gives investors downside protection and potentially a better deal and large effective discount if your company takes off and the priced round valuation is significantly higher than the valuation cap.

Example:
Let’s say an investor puts in $200K at a $5M valuation cap. If your priced round ends up at a $10M post-money valuation, that investor’s SAFE converts as if the company were only worth $5M—effectively giving them a 50% discount and double the number of shares for their investment relative to the priced-round preferred stock investors.

Why investors like it:

• Guarantees a maximum price per share.
• Can lead to a large effective discount (much bigger than a flat 20% discount).

Why founders should be cautious:

• Choosing the “right” cap is tricky. Too low, and you risk turning off future priced-round investors who see SAFE holders getting an unreasonable amount of equity for their investment.
• While a valuation cap isn’t an enterprise valuation, it will feel like one during negotiations and certainly has to be negotiated like one based on all the factors of your company's progress and traction to date. These debates can get complicated and slow things down.

General valuation cap ranges:

• $2–4M: Early idea stage, first-time founders.
• $4–7M: MVP built, some traction.
• $8–12M: Strong founding team, real traction, high investor interest. Valuation caps can certainly go higher - up to even $20m or higher in exceptional cases.

3. Valuation Cap OR Discount (Whichever Is Better for Investor)

This hybrid SAFE gives the investor the better of the discount or the valuation cap at conversion (whichever results in more shares). For obvious reasons, this is the most investor-friendly.

Pro tip: YC SAFE forms no longer include this structure by default, and founders typically should not offer it unless specifically requested by an investor. It’s mainly requested by more sophisticated investors who want downside protection no matter what happens in the priced round.

Other Key SAFE Terms Founders Should Know:

Pro Rata Rights

This allows the investor to participate in future rounds to maintain their ownership % by investing more at the same price as new investors. Not necessarily bad—just don’t offer it to everyone as it can complicate future rounds and "crowd out" the addition of other strategic investors in the future. Usually reserve for lead investors or larger checks.

Information Rights

Investor gets access to quarterly and annual financials (P&L, balance sheet, cash flow). This can be a reporting burden, so limit it to lead or major investors who ask for it. You can also negotiate whether annual reports need to be audited - obviously aiming for unaudited.

Most Favored Nation (MFN) Clauses

This gives an investor the right to get better terms if a later SAFE investor gets them. If you give someone a $6M cap with MFN and later issue a SAFE at a $5M cap, you have to give them the $5M cap too. Be careful how you use this. MFN clauses can be a real risk, but sometimes you just have to concede here.

Board Observer Rights

Investors might ask for this. Generally: push back. Board observer rights should be reserved for institutional investors in a priced round, not early SAFE holders. And basically never offer an actual Board seat for a SAFE investment.

SAFE Anti-Dilution Mechanics (YC Post-Money Model):

YC’s post-money SAFEs count dilution from future SAFEs against the founders, not the existing SAFE investors. This is supposed to push companies toward raising priced rounds sooner. You can redline this definition if you want to share that dilution between the founders and existing SAFE investors, but then you lose the ability to say “we’re using the standard YC SAFE.” Big and important tradeoffs here with no "right" answer. But I tend to believe using the YC SAFE Form outweighs the costs, and you can shape your behavior with knowledge of the above to limit the number of subsequent SAFEs you raise under if you know that the YC SAFE Form carries this consequence.

Here’s a great breakdown of how to modify the SAFE math if you’re curious: Silicon Hills Lawyer

Legal Costs of SAFEs vs. Priced Rounds

SAFEs can be a great tool for getting early capital in the door quickly without the headache and legal costs of a full priced round. SAFEs can cost $0-$5,000 in legal bills. Series Seed priced rounds can cost $10,000-$40,000 in legal bills. This is WHY SAFEs have become so popular for early stage startups.  

Final Thoughts

While SAFEs are a great tool, as with most things in startup law the devil is in the details. What seems like a “standard” form can have real consequences for your cap table, dilution, and future investor interest - this is particularly true in setting valuation caps in valuation-cap SAFEs.

My advice? Be intentional about the type of SAFE you use and who you give what terms to. Use the YC forms unless you have a good reason not to. And talk to a lawyer who knows startup financing (happy to be that person) before you issue them.

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