How a SAFE works, and what the post-money change really cost founders.

What a SAFE actually is

A SAFE is a short contract. The investor pays money now. In exchange the company promises to issue shares later, when it next sells preferred stock in a priced financing, at a price derived from that round rather than fixed today. Y Combinator published the original form in late 2013 to replace convertible notes in seed rounds, and replaced it with the post-money version in 2018.

The appeal is that nobody has to agree on a valuation. Pricing a company with three engineers and no revenue is guesswork, and the negotiation costs more in legal fees and founder attention than the answer is worth. A SAFE defers the argument to the round where there is enough information to have it.

What the investor gives up is real. Until conversion they hold no stock: no vote, no information rights unless separately granted, no board seat, and no claim on assets ahead of anyone. If the company is acquired before a priced round the SAFE has its own payout mechanics, and if the company simply stops there is nothing to repay. That is the trade — cheap and fast, in exchange for holding a promise.

Valuation cap, discount, or both

A SAFE needs some rule for turning money into shares, because the round price is not known at signing. Two rules are in common use, and some SAFEs carry both.

A valuation cap is a ceiling on the valuation the SAFE converts at. If the SAFE has a $8m cap and the priced round happens at a $40m valuation, the SAFE converts as though the company were worth $8m. A discount takes a fixed percentage off the round price — a 20% discount converts at 80% of what the new investors pay. A cap rewards an investor for being early when the company does well. A discount rewards them for being early when the company does not move much.

Where both appear in one document, the holder takes whichever gives them more shares — that is, the lower conversion price. The table below runs a single SAFE of $500,000 with an $8,000,000 post-money cap and a 20% discount against four possible round prices. Assume the company has 9,000,000 shares outstanding on a fully diluted basis before this SAFE converts, which makes the SAFE 6.25% of the post-SAFE capitalization ($500,000 ÷ $8,000,000) and fixes the cap price at $0.8333.

Y Combinator's own library does not publish a combined cap-and-discount form. The US set is a cap with no discount, a discount with no cap, and an uncapped MFN, plus a separate pro rata side letter. Documents that stack both terms come from elsewhere and are not less legitimate for it, but a founder should notice that they are signing something outside the standard set.

The pre-money to post-money change, and why it matters

The 2013 SAFE used a pre-money valuation cap. The conversion price was the cap divided by the share count before any SAFEs converted, so nobody could say in advance what percentage a SAFE holder would end up with. Every subsequent SAFE added shares to the denominator and shrank the earlier holders. Y Combinator changed the form in 2018 after seed rounds grew large enough that, in their words, "these rounds are really better considered as wholly separate financings, rather than 'bridges' into later priced rounds."

Under the post-money form the cap is measured against the capitalization that includes all converting SAFEs. The consequence is arithmetic rather than legal: an investor putting $1,000,000 into a $10,000,000 post-money cap owns 10% of the company immediately before the priced round, and that 10% does not move no matter how many more SAFEs the founders sell. Y Combinator's stated reason was that both sides can "calculate immediately and precisely how much ownership of the company has been sold."

The table below stacks identical $1,000,000 SAFEs at a $10,000,000 cap onto a company with 8,000,000 founder shares and a 2,000,000-share unissued option pool — 10,000,000 shares before any SAFE. It shows the first investor's stake and the founders' stake immediately before a priced round, under each form.

Read the two founder columns together and the trade is plain. The post-money form made the investor's outcome exact and made the founders absorb every point of dilution from every subsequent SAFE. Under the old form the pain was shared. That is why the change is usually described as investor-friendly, and why founders who raise a long series of SAFEs at the same cap can arrive at their Series A owning far less than they expected.

A worked conversion, end to end

Take one company through the whole sequence. Before any financing it has 8,000,000 founder common shares and a 2,000,000-share unissued option pool: 10,000,000 fully diluted. It sells a single $2,000,000 SAFE at a $10,000,000 post-money cap, then raises a Series A of $5,000,000 at a $20,000,000 pre-money valuation. Assume for clarity that the Series A does not require a new option pool.

Run the same facts through a pre-money SAFE and the numbers move. The conversion price would be $10,000,000 ÷ 10,000,000 = $1.00, the SAFE would buy 2,000,000 shares rather than 2,500,000, and after a $5,000,000 Series A at $20,000,000 pre-money the holder would own 13.3% instead of 16.0% — with the founders at 53.3% instead of 51.2%. One clause, roughly two and a half points of the company.

MFN, pro rata, and the other clauses

The uncapped MFN SAFE has no cap and no discount at all. Instead it carries a most favoured nation clause: if the company issues another SAFE or convertible instrument before the priced round on terms the holder prefers, the holder may elect to take those terms. It is the cheapest possible instrument to negotiate, because there is nothing to negotiate, and it is common where an accelerator or a first cheque does not want to set a number that anchors everyone else.

Pro rata rights — the right to buy enough of the next round to maintain your percentage — sit in a separate pro rata side letter rather than in the SAFE itself. Keeping it out of the main document means a founder can grant it selectively, and means the SAFE stays short. Three other clauses are worth reading before signing any SAFE:

• The liquidity event provision, which says what the holder receives if the company is acquired before any priced round. Typically it is a choice between the money back and converting at the cap.
• The dissolution provision, which ranks SAFE holders behind creditors but ahead of common stock if the company winds up. In practice there is rarely anything left.
• The definition of the equity financing that triggers conversion. A minimum round size means a small bridge round will not convert the SAFE, which can be helpful or unhelpful depending on which side you are on.

Where SAFEs go wrong

• Selling SAFEs one at a time at the same cap over eighteen months. Each one is small and each one feels harmless; together they can hand over a third of the company before anyone builds a cap table. Model the stack, not the cheque.
• Forgetting the option pool. If the Series A investor requires a new pool created before the round, that pool comes out of everyone who converted, not out of the new money. See /equity/pre-money-vs-post-money.
• Assuming a $10m post-money cap means a $10m valuation. It is a ceiling on the conversion price, not an agreed price, and it has no bearing on the 409A fair market value of common stock. See /equity/409a-valuation.
• Treating uncapped MFN SAFEs as free. They convert at the round price with no discount, which is generous to the company, but they still convert — and if a later capped SAFE is issued, the MFN holder can take that cap.
• Losing the paperwork. Side letters, pro rata grants and MFN elections live outside the SAFE and outside most cap table software defaults. They still bind.