Glossary
SAFE (simple agreement for future equity)
What a SAFE is, how it converts into shares, the terms that decide its value, and what it means for investors in a crowdfunding raise.
A SAFE, or simple agreement for future equity, is a contract that gives an investor the right to receive shares in a company later, usually when the company raises a priced round, is sold, or goes public. The investor pays now but owns no shares yet. A SAFE is not debt: it carries no interest and no maturity date, and the company never has to pay it back.
Y Combinator introduced the SAFE in 2013 as a simpler alternative to the convertible note for early startup rounds. It is now common in Regulation Crowdfunding offerings too, sometimes as a "Crowd SAFE."
How a SAFE converts
A SAFE turns into shares when a triggering event named in the contract happens. The terms that decide how many shares the investor gets are:
- A valuation cap, the highest company valuation at which the SAFE converts. If the next round is priced above the cap, the SAFE investor converts as if the price were the cap, and gets more shares than new investors for the same money.
- A discount, a percentage off the price new investors pay in the round that triggers conversion.
A SAFE may have a cap, a discount, both, or neither. If the company is sold before conversion, the SAFE usually pays out either the original investment or the shares it would have converted into, whichever the contract says.
What it means for crowd investors
A SAFE investor is not a shareholder until conversion. Until then they generally have no vote, no dividends, and nothing to sell. If the company never raises a priced round and is never sold, a SAFE may never convert. Some SAFEs used in crowdfunding let the company choose when, or whether, a round triggers conversion. The SEC has warned retail investors to read those terms closely.
For an issuer, a SAFE avoids setting a valuation today. That makes it quick to use, but it is also harder for an ordinary investor to understand than shares at a stated price, and the offering page has to explain it plainly. See what goes on an offering page.
Further reading
This page is general information about securities, not legal or investment advice. Whether a SAFE fits a particular offering, and what its terms should be, is a question for the company's securities counsel.