Simple Agreement for Future Equity (SAFE)

Definition: A SAFE is a financing instrument that gives investors the right to receive equity in a startup during a future funding round or exit event, without creating debt or immediately setting a company valuation.

Key features:

Created by Y Combinator in 2013 as a streamlined alternative to convertible notes
Not a debt instrument, which eliminates interest payments and maturity dates
Contains provisions like valuation caps and discount rates that determine equity conversion terms
Triggers conversion automatically during qualified financing rounds or liquidation events

SAFEs function like a promise for future ownership rather than an immediate equity stake or loan. When a startup raises a priced equity round, the SAFE investor's capital converts to shares, typically at favorable terms compared to new investors.

SAFE Example:

If an investor provides $100,000 via a SAFE with a $5 million valuation cap, and the company later raises at a $10 million valuation, the SAFE investor would convert at the $5 million cap rate, effectively doubling their equity compared to new investors contributing the same amount.