📄 SAFE (Simple Agreement for Future Equity)

🎉 Happy Friday, funds family!

The SAFE (Simple Agreement for Future Equity) has become the default early-stage financing instrument for VCs/investors. But despite the name, a SAFE is not always simple! The market terms have also evolved meaningfully over time. It’s an important topic for companies and investors alike, because what looks like a small set of economics can drive significant dilution and value transfer at the next round.

A SAFE is a contract between the company and the investor under which the investor pays cash (typically) now in exchange for the right to receive equity later, on terms determined at the next priced equity round. There is no maturity date, no interest, and no obligation to repay (unlike convertible notes). The terms of the conversion turn on a few key parameters: valuation cap, discount, most-favored-nation, and pro rata.

➡️ How does a SAFE actually convert?

When the company raises a priced equity round, the SAFE converts into shares of preferred stock. The price per share at conversion is generally the lower of:

• The price implied by the valuation cap, or

• The price implied by the discount applied to the next round’s price

As an example, if the next round is priced at $10 per share with a 20% discount, the SAFE converts at $8 per share. If the SAFE has a $10 million post-money valuation cap and the company raises at $20 million, the cap drives the conversion price even lower than the discount would. SAFEs may also convert on a liquidity event (e.g., sale of the company) or a dissolution, with mechanics that determine whether the holder gets cash, stock, or a return of capital. In the market nowadays, valuation cap has become the norm, and many companies forgo the discount percentage entirely.

➡️ What are the common market terms today?

The market today generally looks like:

• Post-money SAFEs are now the standard form, not the older pre-money form. The post-money form gives investors clearer dilution protection because the cap is measured after all SAFEs convert.

• Valuation caps are the primary economic lever, with discounts being secondary or absent in the market these days. When used, discounts are typically in the ~10–20% range.

• The most-favored-nation (MFN) provisions are common for early checks, allowing the SAFE holder to elect into more favorable terms granted to later SAFE investors.

• Pro rata rights are increasingly negotiated separately and are often not included in the standard form as a default.

• Side letters covering pro rata, information rights, or board observer rights are fairly common for larger checks (“lead investors”).

• MFN-only or uncapped SAFEs still appear, but generally only for the very earliest checks or for investors with significant strategic value.

➡️ What are the most common problems in a SAFE financing?

The most common SAFE issues we see in practice are:

• Companies stacking too many SAFEs at different caps, leading to surprise dilution at the priced round.

• Founders and investors not modeling the conversion correctly, and discovering at the next round that they have given away more equity than expected.

• Investors signing pre-money SAFEs that get diluted by every subsequent SAFE, instead of post-money SAFEs that lock in the ownership percentage.

• Missing or unclear pro rata rights, which leave investors unable to maintain ownership in subsequent rounds.

• Conversion mechanics that are inconsistent with later-round terms, creating cleanup costs at the priced round.

➡️ How should investors evaluate SAFE terms today?

For an investor, we’d say the key questions are:

• What is the valuation cap, and is it consistent with the company’s stage, traction, industry, and progress?

• Is it post-money or pre-money? (post-money, typically).

• Are there MFN and pro rata provisions, and are they cleanly drafted?

• How many other SAFEs are outstanding, at what caps, and what does the conversion table look like at different next-round valuations?

• Does the company understand what the conversion will do to its cap table?

• Is there a side letter, and if so, are its terms consistent with the SAFE?

➡️ The practical takeaway

For the company:

1. Post-money SAFE form unless there is a specific reason to use the pre-money form.

2. Pick valuation caps deliberately, and model the conversion at the planned next round before signing.

3. Track every outstanding SAFE in a cap table tool that can model conversion correctly.

4. Don’t let the SAFE round drift too long without a priced round, or the stack of SAFEs may become unmanageable.

5. Be careful with side letters and MFN provisions — each one creates downstream cleanup work.

For the investor:

1. Read the SAFE form carefully and confirm it is post-money.

2. Negotiate the cap, discount, and MFN clearly and ensure they are reflected on the face of the document.

3. Push for pro rata rights, especially for larger checks.

4. Run the conversion math at multiple potential next-round valuations before signing.

5. Ask for the existing SAFE/note schedule and a cap table, and review them as part of diligence.

Thanks for reading, everyone!

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.