A SAFE (Simple Agreement for Future Equity) lets investors give you money now in exchange for equity later. Created by Y Combinator in 2013, it has become the standard for pre-seed and seed rounds.
The maximum valuation at which the SAFE converts to equity. Protects early investors if your company grows quickly.
Example: You raise $100K with a $5M cap. If your Series A is at $10M, the SAFE converts as if the company was worth $5M, giving investors 2% instead of 1%.
A percentage discount on the Series A price. Typically 15-25%. Rewards early investors for taking more risk.
Example: With a 20% discount, if Series A shares cost $1.00, SAFE investors pay $0.80 per share.
If a SAFE has both a cap and discount, investors get whichever gives them more equity. The cap usually wins if valuation increased significantly.
If you issue SAFEs with better terms later, MFN holders can adopt those terms. Protects early investors from being disadvantaged.
Conversion calculated before the new investment. If you do multiple SAFE rounds, they dilute each other less.
Better for: Founders doing multiple SAFE rounds
Conversion calculated after the investment. Clearer dilution math, but multiple rounds stack up more dilutively.
Better for: Single SAFE rounds, clearer cap table math
Tip: Know which type you are signing. The dilution impact differs significantly, especially with multiple SAFE rounds.
SAFEs convert to equity when you raise a priced round (typically Series A). Here is a simplified example:
You raised $200K on a SAFE with $5M cap and 20% discount. Now raising Series A at $10M pre-money.
Series A price: $1.00/share (based on $10M valuation)
With 20% discount: $0.80/share
With $5M cap: $0.50/share (as if company worth $5M)
Result: SAFE converts at $0.50 (better of the two), giving investors 4% ownership ($200K / $5M cap)
Multiple SAFE rounds can dilute you significantly. Model the total conversion before signing more.
A $3M cap vs $6M cap is a huge difference in dilution. Negotiate caps based on your traction.
Stick to standard Y Combinator templates. Custom terms often favor investors and complicate future rounds.
Pitchkit helps you model SAFE conversions and understand dilution before you sign.
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