SAFEs in plain language

You may be offered a SAFE, or hear other founders talk about one. This guide explains the instrument in general terms, using the publisher’s own description, so that you can read the real document with some confidence and ask better questions of your own lawyer.

It describes the public standard forms. It does not describe any agreement between a founder and World Enterprise, and it is not legal advice. Read it as a glossary with context, not as a recommendation to sign or not to sign anything.

The idea in one paragraph

Y Combinator, which publishes the standard forms, describes a SAFE as “a short contract an investor signs to fund your startup now in exchange for the right to shares of stock in your startup later”. The investor does not receive shares on the day the contract is signed. They receive a right to shares, and the document says when and how that right turns into shares.

How it differs from a priced round

In a priced round, the company and its investors agree on a price per share on the day the money moves, and shares are issued. With a SAFE, no price per share is set on signing. The price is worked out later, by rules written into the document, when the company raises a priced round or another event defined in the document takes place.

That deferral is the reason some founders and investors use the instrument: it avoids agreeing a company valuation at a very early stage. It is also the reason the rules in the document matter so much. A founder who signs without understanding how conversion works may be surprised later by how much of the company the investor holds.

A SAFE is a contract for future shares. It is not the same as a loan or a convertible note, and a lawyer can explain exactly how those instruments differ for your company.

Terms you will meet

The definitions below are general descriptions of terms that appear in public SAFE documents. They are not the terms of any agreement involving WE, and they are shown here so that you can recognize the words when you read a real document.

Valuation cap

A ceiling on the company valuation used to work out how many shares a SAFE converts into. A lower ceiling gives the investor more shares for the same money.

Discount

A percentage reduction applied to the price per share that new investors pay in the later round, used to set the price at which the SAFE converts.

MFN

Short for most favored nation. Y Combinator describes it as a SAFE that “automatically takes the valuation cap or discount of any SAFE you issue later.”

Pro rata right

Y Combinator describes it as “the right, not the obligation, for an investor to invest money into your startup’s future priced round to maintain their percentage ownership.”

Pre-money and post-money

A pre-money valuation is the value of the company before new money is added. A post-money valuation includes the new money. Which one a SAFE uses changes how ownership is calculated, so check which one your document uses.

Y Combinator publishes several forms: versions with a valuation cap, with a discount, or with an MFN provision, and a separate pro rata side letter. Versions for other jurisdictions also exist.

Two terms that are not in the contract but matter

Conversion is the moment the right to shares becomes shares. Dilution is the reduction in the percentage of the company each existing owner holds when new shares are issued. A SAFE does not dilute anyone on the day it is signed, but every SAFE you sign adds to the dilution that appears when they convert, and that dilution adds up.

Questions to bring to your own counsel

Your lawyer works for you and knows your company. Bring these questions, and add your own.

• How will this document convert in my company, under several different future rounds, and what will my ownership be after each?
• What happens to the SAFEs I have already signed when I sign another one?
• Which events does the document treat as a trigger for conversion, and what happens if none of them occurs?
• Does the document give the investor any rights beyond conversion, such as information rights or side letters?
• What do I have to file, disclose or approve, and who else has to approve it?
• Which securities rules apply to whom I approach and what I say to them?
• How does this document fit with the agreements the company has already signed?

Model it before you sign

Ask your counsel or an adviser you trust to walk you through a worked example using your own cap table. Seeing the effect on your own ownership under assumed future rounds teaches more than any general explanation. Keep the example, with its assumptions, in your seed data room.

What this page leaves out on purpose

This guide says nothing about what a fair set of terms looks like, what any investor will accept or how much anyone should raise. Those depend on your market, your investors and your lawyer’s advice. A company’s ownership records and any contracts it has signed belong in the data room and in front of your own counsel. The investor readiness checklist shows where this fits among the other pieces of evidence you may be asked for.