The post-money SAFE

A SAFE (simple agreement for future equity) is a contract in which an investor pays money now in exchange for shares the company will issue later, usually when it sells preferred stock in a priced round. It is not a loan: there is no interest and no maturity date. Y Combinator published the original SAFE in 2013 and replaced it in 2018 with the post-money SAFE, which is now the default instrument for pre-seed and many seed rounds in the United States. YC's forms are free to download and the company and investor fill in only a few blanks.

This page explains the post-money SAFE's terms and then works through its conversion with numbers, using the same calculation as our cap-table calculator (validated against YC's own examples; see methodology).

The terms you negotiate

A post-money SAFE has very few variables. In YC's forms they are:

Everything else (what happens in a sale, in a shutdown, how shares are calculated) is fixed by the form. YC's forms include a statement that neither party changed them except to fill in blanks, so that nobody has to compare a document line by line against the template. If a SAFE you are offered has edits, read them carefully.

Ownership: amount divided by cap

The post-money cap makes the ownership you sell easy to calculate before anything converts. Take a company with 10,000,000 fully diluted shares: two founders with 4,500,000 each, 400,000 options granted and 600,000 left in the option pool. It raises $1 million on a SAFE with a $10 million post-money cap.

SAFE ownership = $1,000,000 ÷ $10,000,000 = 10.0%

That 10% is taken proportionally from every existing holder, exactly as if the SAFE had been a priced round at a $10 million post-money valuation:

Several post-money SAFEs do not dilute each other: each one's percentage is fixed by its own amount and cap, and the founders and option holders absorb all of it. A $500,000 SAFE at an $8 million cap and a $1 million SAFE at a $12 million cap together sell 14.58% of the company, regardless of the order in which they are signed.

How it converts in a priced round

When the company sells preferred stock in a priced round (an "Equity Financing" in the SAFE's language), every SAFE converts automatically. The SAFE holder receives "Safe Preferred Stock": the same series as the new investors' preferred, but with a per-share price, liquidation amount and conversion price based on the SAFE price. The number of shares comes from the Company Capitalization, which counts:

• all issued shares (founders' common stock and any earlier preferred),
• granted options and options promised to people who have been hired,
• the unissued part of the existing option pool,
• all converting SAFEs and notes,

but not the increase to the option pool made as part of the priced round, and not the new investors' shares. So the SAFEs are diluted by the new round's money and its new pool, like everyone else, but not by each other or by hires made with their money.

Continue the example. The company raises a $6 million Series A at a $24 million pre-money valuation, and the term sheet requires an available option pool of 10% after the round.

1. SAFE conversion shares. Company Capitalization = 10,000,000 existing shares ÷ (1 − 10%) = 11,111,111. The SAFE receives 10% of that: 1,111,111 shares, an effective price of $0.9000 per share ($10 million ÷ 11,111,111).
2. Option pool increase. The pool is topped up in the pre-money so that 10% of the post-round company is available: 901,588 new shares reserved.
3. Series A price. Pre-money valuation ÷ pre-money fully diluted shares (existing + SAFE shares + pool increase) = $24,000,000 ÷ 12,012,699 = $1.9979.
4. New shares. $6,000,000 ÷ $1.9979 = 3,003,153 shares of Series A preferred.

The SAFE investor bought 10% before the round and holds 7.40% after it, diluted by the new money (20%) and by the pool increase. The founders hold 59.94% together. Their Series A preferred cost $1.9979 per share; the SAFE's cost $0.9000, which is the reward for investing earlier.

When the round is priced below the cap

The cap is a ceiling, not a promise. A SAFE converts at whichever price gives its holder more shares: the cap price or the price the new investors pay. If the priced round values the company below the cap, the SAFE converts at the round price and its holder receives more than the amount ÷ cap percentage.

Suppose instead the company raises $2 million at an $8 million pre-money valuation. The round price is $0.6383, below the SAFE's cap price, so the SAFE converts at $0.6383 into 1,566,661 shares of the same preferred stock the new investors buy, 10.00% of the company after the round instead of the 7.40% it ends with when the round is priced above its cap (both rounds sell 20% for new money and leave a 10% pool). YC's guide notes the same effect when the round's valuation is close to the cap: ownership "may convert into more than the estimated ownership".

Discount-only and MFN SAFEs

A discount-only SAFE has no cap. It converts at the round price less the discount: with a 20% discount and a round price of $1.00, the SAFE price is $0.80, so each dollar buys 1.25 shares. Its ownership is not known until the round is priced, which is why it is uncommon for rounds of any size. A SAFE that has both a cap and a discount converts at whichever gives more shares; our calculator supports both terms even though YC no longer publishes that form.

An uncapped MFN SAFE has neither. If no better SAFE is issued before the priced round, it converts at the round price, exactly like new money but without the new investors' bargaining. It is mainly used for very early checks from friends or angels when a valuation is premature. If the company later issues a SAFE with a cap or discount, the MFN holder can elect to adopt that later SAFE's terms.

If the company is sold or shuts down first

• Sale (a "Liquidity Event") before a priced round: the SAFE holder receives the greater of its money back or what its shares would receive if the SAFE converted to common stock at the cap. For the as-converted calculation the unissued option pool is excluded. YC's examples show a $200,000 SAFE at a $4 million cap receiving about $500,000 in a $10 million sale, but only its $200,000 back in a $3 million sale.
• Shutdown (a "Dissolution Event"): SAFE holders are entitled to their purchase amount back, after creditors (including noteholders) and on a par with preferred stock, out of whatever is left. In practice a shut-down startup often has little left.
• IPO: treated like a sale; the SAFE converts to common stock.

Practicalities

• The board approves the issuance of SAFEs before they are signed (YC's guide says a board consent is required).
• Keep a pro forma cap table showing each SAFE as converted at its cap, updated with every signing. Our calculator does this.
• Selling a SAFE is a securities offering. In the U.S. that means relying on an exemption such as Regulation D and filing Form D; see US securities law for founders. YC's form lets the company rescind a SAFE held by someone who is not accredited when the priced round happens.
• Mixing SAFEs with convertible notes complicates a sale: notes are debt and are repaid before SAFEs. YC advises against issuing both.
• The tax treatment of SAFEs is not settled in every respect; YC says it intends the SAFE to be an equity security, and recommends asking a tax adviser.

Sources

1. SAFE financing documents (post-money SAFE forms and pro rata side letter), Y Combinator. Cited for facts; forms are CC BY-ND 4.0 and not reproduced.
2. Post-Money Safe User Guide, Y Combinator. Cited for facts; not reproduced.