SAFE (Simple Agreement for Future Equity)
A convertible security that allows investors to invest in a startup with the right to convert to equity in a future financing round.
Definition
A SAFE is an investment contract created by Y Combinator that provides a simpler alternative to convertible notes. It gives investors the right to receive equity when certain triggering events occur, such as a future equity financing round, without the complexity of debt terms like interest rates and maturity dates.
Key Features
- • No interest rate or maturity date
- • Converts to equity in future financing round
- • May include valuation cap and/or discount
- • Simpler and faster than convertible notes
- • Not technically debt
- • Standard template reduces legal costs
Real-World Example
Seed Investment: Angel investor invests $100K via SAFE with $5M valuation cap
When the startup raises Series A at $10M pre-money, the SAFE converts at the $5M cap, giving the investor a better price than Series A investors.