A SAFE gives an investor the right to shares at a future priced round, usually at a valuation cap. With post-money SAFEs, each additional SAFE dilutes the founders rather than earlier SAFE holders.
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SAFEs made early fundraising faster and cheaper, which is a genuine improvement. I think their simplicity also makes them easy to issue carelessly: each one feels like a small cheque, and the combined ownership only becomes vivid at the priced round. Investors and founders both benefit from treating SAFEs as shares that simply have not been counted yet.
A SAFE (simple agreement for future equity) is not a share and not a loan. It is a contract giving the investor the right to receive shares when the company later raises a priced round, typically at a price based on a valuation cap, sometimes with a discount.
It has no interest and no maturity date. If no priced round ever happens and the company is sold or dissolved, the SAFE's terms set what the holder receives, typically ranking behind debt.
Post-money SAFEs. A widely used standard version sets ownership against the company's value including the SAFE money. A 500,000 SAFE with a 5,000,000 post-money cap converts into:
500,000 / 5,000,000 = 10% of the company, measured just before the priced round
If the company issues a second 500,000 SAFE at the same cap, that holder also gets 10%. Both SAFE holders keep their 10%; the founders absorb the dilution:
Holder After SAFE 1 After SAFE 2 Founders 90% 80% SAFE 1 10% 10% SAFE 2 - 10%
Then a priced Series A sells 20% of the company. Everyone is diluted by 20%:
Founders 80% x 0.80 = 64% SAFE 1 10% x 0.80 = 8% SAFE 2 10% x 0.80 = 8% Series A 20%
Because SAFEs are common in early rounds and easy to misunderstand. For an investor, the cap largely decides the price you will pay. For founders and earlier holders, stacking many post-money SAFEs can create more dilution than expected.
SAFEs also carry fewer protections than priced shares. Holders are not shareholders until conversion and usually have no voting or information rights by default.
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Founder surprise from stacked SAFEs. A founder raises four SAFEs of 250,000 each at a 5,000,000 post-money cap, thinking of each as small.
Each SAFE converts to 250,000 / 5,000,000 = 5% Four SAFEs together = 20% Founders before Series A = 80%
A Series A then sells 25%. Founders own 80% x 0.75 = 60%, and the four SAFE holders together 20% x 0.75 = 15%. Each SAFE seemed modest; together they took a fifth of the company before the first priced round.
Treating each SAFE separately rather than totalling all SAFEs outstanding to see their combined dilution.
For post-money SAFEs, divide the investment by the post-money cap.
Add every SAFE's percentage to see how much of the company they will take before the next round.
Multiply all pre-round percentages by one minus the share sold in the priced round.
Check what the SAFE pays if the company is sold or shuts down before a priced round.
When investing through a SAFE, or evaluating a company with SAFEs outstanding.
Do not assume all SAFEs follow the same template. Pre-money and post-money versions, caps, discounts and side letters vary.
Y Combinator introduced the SAFE in 2013 and published a post-money version in 2018, explaining that it made each holder's ownership easier to calculate. The standard documents and explanatory notes are publicly available and widely used as templates.
Read which SAFE version you are signing. Pre-money and post-money SAFEs allocate dilution differently.
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