Capital & Financing
What Is a SAFE (Simple Agreement for Future Equity)?
A SAFE is a contract that gives an investor the right to receive equity in a future priced round, not a loan and not current shares. Founders use SAFEs to raise capital quickly without setting a valuation today. The investor converts at a discount or valuation cap when you raise your next round.
A SAFE (Simple Agreement for Future Equity) is a contract where an investor gives you capital today in exchange for the right to convert to equity at a future priced round. Invented by Y Combinator in 2013, it's the standard early-stage instrument for DTC, SaaS, and consumer brands.
How a SAFE works
You receive $250K from an investor on a $5M post-money SAFE cap, 20% discount. At your next priced round, the SAFE converts to equity using the lower of (a) the $5M cap or (b) the next-round price with 20% discount.
If the next round prices at $20M post-money: the SAFE converts at $5M (the cap is the lower price). The $250K becomes $250K ÷ $5M = 5% of equity at that point.
If the next round prices at $4M post-money: the SAFE converts at $4M × 80% = $3.2M (the discount is the lower price). The $250K becomes $250K ÷ $3.2M = 7.8% of equity.
Common SAFE terms
- Cap: $3M$30M depending on stage/traction
- Discount: 15-25% (sometimes no discount if cap is aggressive)
- Most-Favored-Nation (MFN) provision: SAFE adjusts if you later issue a better SAFE
- Pro-rata rights: investor can maintain ownership in next round
Post-money vs pre-money SAFE
Post-money SAFE (2018 update, current default): cap = post-money valuation. Cleaner dilution math.
Pre-money SAFE (original): cap = pre-money valuation. Dilution depends on size of next round. Largely deprecated.
The most common mistake
Issuing SAFEs without modeling the dilution. Each SAFE looks small individually but stacks. A stack of $1.5M in SAFEs at a $5M cap is 30% dilution at the next round, sometimes a surprise to founders who issued them one at a time. Always model the cumulative SAFE conversion before signing.
Frequently Asked Questions
how does a SAFE work?
Capital today for equity at the next priced round, with cap and/or discount.
cap vs discount?
Cap usually matters more, sets max conversion valuation.
when does it convert?
At next priced equity round, acquisition, or IPO.
Related Terms
Browse the full ecommerce finance glossary for every metric and money term a DTC operator needs.
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