SAFE Notes

What is a SAFE—and what is it not?#

A SAFE is one of several instruments in the broader map of how startup funding works. It separates the date cash enters the company from the date the investor receives shares. The investor pays a purchase amount when the SAFE is issued. The agreement then specifies three broad situations:

• Equity financing: The SAFE normally converts automatically into preferred stock. Under YC's post-money form there is no minimum financing size required to trigger conversion.
• Liquidity event: On an acquisition, merger, or IPO before conversion, the investor generally receives the greater of its purchase amount or the value of an as-converted claim, subject to the agreement's priority provisions.
• Dissolution event: If the company shuts down, the holder is entitled to its purchase amount only if funds remain after creditors and debt are paid.

Under the standard YC post-money form, the SAFE is junior to creditors and debt, on par with other SAFEs and standard non-participating preferred, and senior to common stock for the applicable payment. It has no maturity date, so it can remain outstanding for a long time and terminates only after the holder receives stock, cash, or other proceeds under the first relevant trigger.

Before conversion, a SAFE is not common stock. The holder does not automatically have voting, information, dividend, or governance rights; those depend on the SAFE, any side letter, and the shares issued at conversion. The SEC therefore cautions investors to read the actual instrument: triggers and conversion terms vary, and a SAFE may never convert if no specified event occurs—leaving the investor with nothing.

Why do SAFEs matter to founders?#

They let you close a round one investor at a time. Instead of coordinating a single closing, the company can sign and receive funds from each investor as they become ready. This "high-resolution fundraising" shortens the time between an investor's yes and cash in the bank.

They defer the share-price calculation, not the economics. A SAFE postpones the exact share count until a financing supplies the missing inputs—but it does not postpone dilution. "We haven't set a priced-round valuation" can be true while "we haven't sold any ownership yet" is economically false. A cap is not a present valuation, but it sets a ceiling on the conversion price and therefore a minimum ownership claim in the usual up-round case.

They turn runway into a dilution decision. Raising $750,000 at a $12M cap is 6.25% cap-implied ownership; raising $1.5M at the same cap is 12.5%. More runway may be worth it if it materially improves the next round—but the trade-off should be explicit, with the ask, burn, milestone, and dilution budget in one model.

They shape later hiring and financing capacity. The SAFE stack becomes part of the fully diluted cap table. A round that looks cheap in legal fees can still be expensive in equity if the company keeps taking small checks without tracking aggregate dilution.

How does a SAFE go from cash today to shares later?#

1. The company picks a form and economic term. YC currently publishes three U.S. post-money versions:

The user guide also explains a cap-plus-discount variation: when both apply, the calculation most favorable to the investor governs.

2. The investor funds the purchase amount. Cash is wired and the executed SAFE is delivered—no shares are issued yet. Record the instrument, holder, amount, date, cap or discount, MFN terms, side letters, and board approval in a central cap-table record.

3. A trigger fixes the settlement. In an equity financing, a cap-only post-money SAFE compares shares based on the Safe Price with shares based on the price paid by the new investors, and the holder receives whichever produces more shares. A cap protects the investor from converting above the cap-based price; a low-priced financing can produce even more shares than the cap-implied estimate.

4. The SAFE becomes stock. The holder usually receives a separate "shadow" sub-series of preferred stock that tracks the new round but carries economics—liquidation preference, conversion price—based on the SAFE's own purchase amount and conversion price.

What are the key SAFE formulas?#

Cap-implied ownership (post-money cap SAFE):

Target ownership = purchase amount / post-money valuation cap

For multiple post-money cap SAFEs, when every cap price governs:

Total SAFE ownership = sum(purchase amount / post-money cap)

YC's worked example uses a $200,000 SAFE at a $4M cap (5%) plus an $800,000 SAFE at an $8M cap (10%), for at least 15% sold before the new money. "At least" matters: if the priced-round price is below a SAFE's cap-based price, that SAFE receives more shares.

Company capitalization and Safe Price (simplified case, only post-money cap SAFEs over a known pre-SAFE base):

Company capitalization = pre-SAFE fully diluted shares / (1 - total target SAFE ownership)

Safe Price = post-money cap / company capitalization

Cap-based conversion shares = purchase amount / Safe Price

The signed agreement's capitalization definition controls. In YC's form, Company Capitalization includes issued stock, converting securities, and outstanding, promised, and unissued option-pool shares, while generally excluding the option-pool increase adopted with the converting financing.

Discount conversion (a 20% discount is drafted as an 80% Discount Rate):

Discount price = new-round price x 80% → Discount shares = purchase amount / discount price

If an instrument has both a cap and a discount, calculate both and use the lower price (more shares), subject to the signed form.

Dilution from the converting round (ignoring pool increase and pro rata):

New-round investor ownership = new money / (pre-money valuation + new money)

SAFE ownership after round = SAFE ownership before new money x (1 - new-round investor ownership)

Worked example: a $750,000 post-money SAFE#

Assume: founders and the existing pool hold 10,000,000 fully diluted shares before the SAFE; an investor buys a $750,000 post-money SAFE at a $12,000,000 cap with no discount; the next round raises $4,000,000 at a $20,000,000 pre-money valuation. The example ignores other convertibles, warrants, promised options, an option-pool increase, and pro rata—so treat the priced-round price below as a simplification.

The Safe Price ($1.125) is below the round price ($1.875), so the cap-based calculation controls. Post-closing:

The SAFE investor held 6.25% before the new money but 5.208% after—as expected. A post-money SAFE is "post" the SAFE money, not post the new money in the priced round; YC's guide states post-money SAFEs are not diluted by one another, but they are diluted by the converting financing's new money. If this investor held a pro rata side letter and fully exercised it, it could buy 6.25% of the round—$250,000 of the $4M—to offset that dilution. (A pool increase or other securities would shift the final percentages, which is why the round price above is illustrative rather than exact.)

How do SAFEs compare to convertible notes and priced rounds?#

A priced round may be preferable when a lead investor wants a board seat, protective provisions, detailed information rights, or a large, coordinated ownership position. YC frames the choice the same way: once ownership uncertainty is reduced, the remaining question is whether the rights that come with a priced round matter for this financing.

Sources#

1. Y Combinator, Safe Financing Documents. Current U.S. post-money SAFE forms, international forms, pro rata side letter, and overview.
2. Y Combinator, Post-Money Safe User Guide, v1.1. Definitions, conversion mechanics, capitalization, worked examples, event priority, MFN, pro rata, and board approval.
3. Y Combinator, The Standard Deal. $500K structure ($125K post-money SAFE for 7% + $375K uncapped MFN SAFE) and conversion order.
4. U.S. Securities and Exchange Commission, Small Business Glossary. Current regulatory definition of a SAFE.
5. U.S. Securities and Exchange Commission, Investor Bulletin: Be Cautious of SAFEs in Crowdfunding. Trigger risk, not-equity-at-issuance, illiquidity, and instrument-variation warnings.
6. U.S. Securities and Exchange Commission, Private Companies and the SEC, Exempt Offerings, and Early-Stage Investors. Securities offerings, exemptions, and early-stage context.
7. Carta, State of Pre-Seed: Q1 2026. Instrument mix showing SAFEs as the default early instrument.

Educational note: This page explains financing mechanics for founders. It is not legal, tax, accounting, or investment advice. Use qualified counsel and financial advisers for an actual offering and cap table.