SAFE (Simple Agreement for Future Equity)
Definition
An investment instrument created by Y Combinator that gives investors the right to receive equity at a future priced round. SAFEs are not debt — they have no interest rate or maturity date. They convert into preferred stock when the company raises a priced equity round, typically at a discount or with a valuation cap.
Real-World Example
An angel investor puts $100K into a SAFE with a $5M valuation cap. When the company raises a Series A at a $20M valuation, the SAFE converts at the $5M cap, giving the investor 4x more shares than if they had invested at the Series A price. This dilutes existing shareholders.
Common Mistake
As an employee, not understanding how outstanding SAFEs affect your equity. SAFEs convert to shares at the next priced round, creating dilution that is not visible on the current cap table. A company with $2M in SAFEs has dilution waiting to happen that your share count does not reflect.
Why It Matters
Many early-stage companies use SAFEs instead of priced rounds. As an employee, understanding outstanding SAFEs helps you accurately estimate your future ownership percentage. Ask about total outstanding SAFEs and their caps.
Related Terms
Want to learn one equity concept per week?
Read the Newsletter