October 26, 2026
A SAFE (Simple Agreement for Future Equity) is a short contract where an investor pays your startup now and receives preferred stock later, usually at your first priced round. It has no interest, no maturity date and no repayment obligation. Today's market default is Y Combinator's post-money SAFE with a valuation cap, which fixes each investor's minimum ownership up front: the purchase amount divided by the post-money valuation cap.
If you're reading this, you're probably raising your first outside money, and that's an exciting place to be. We've been counsel to early-stage founders since 2008, and we've seen SAFEs go from a Y Combinator experiment to the way almost every pre-seed round gets done. The SAFE is simple to sign, which is exactly why founders get surprised by it later. This guide walks through how the SAFE actually works, with the math, so you can negotiate with confidence and know what your cap table will look like when the SAFEs convert.
Key takeaways
A SAFE is a contract, not stock and not debt. The investor gives the company money today in exchange for the right to receive shares later, usually when the company sells preferred stock in a priced round. Until then, the SAFE holder isn't a stockholder. They have no vote and no statutory information rights.
Unlike a convertible note, a SAFE doesn't accrue interest and has no maturity date, so it never comes due and the investor can't demand repayment. That's the core trade: the investor gives up the protections of debt in exchange for a simpler deal and, usually, a better price than the next round's investors.
Y Combinator introduced the SAFE in late 2013. The original version was a "pre-money" SAFE. It worked when SAFE rounds were small and led quickly into a Series A, but as founders raised larger and more frequent SAFE rounds, it became hard to know how much of the company each SAFE had bought. In 2018 YC released the "post-money" SAFE, which is now the market standard. When we say "SAFE" in this guide, we mean the post-money SAFE.
The SAFE earned its popularity. The YC form is about six pages and investors already know it, so there is little to negotiate beyond the amount and the cap. That saves time and legal fees. There's no interest to track and no maturity date to extend, which removes the two features of convertible notes that cause founders the most headaches. And you can close one investor at a time: as soon as an investor signs and wires, the money is in the bank, without coordinating a group closing. Paul Graham calls this high-resolution fundraising.
The tradeoffs are real, though. The biggest one is that the SAFE is almost too easy. Because each SAFE takes minutes to sign, founders often stack several at different caps without modeling what happens at conversion, and then discover at the seed round how much of the company they've sold. We walk through that math below.
The second tradeoff is legal. SAFE holders aren't stockholders, so they don't have the rights stockholders have under state corporate law until the SAFE converts. But a SAFE is a security. Federal and state securities laws, including the anti-fraud rules, apply to every SAFE you sell, so what you tell investors has to be accurate, and you need to know who you're selling to. See Can My Startup Raise Money From Non-Accredited Investors?
Finally, "no repayment" doesn't mean the SAFE disappears if things go sideways. A SAFE holder has a claim on the proceeds if the company is sold and a priority claim if it shuts down. We cover both below.
Y Combinator currently publishes three post-money SAFEs for US companies on ycombinator.com/documents, plus a pro rata side letter and a SAFE user guide. As of October 2026, the valuation cap form is Version 1.2.
Valuation cap, no discount. This is the market default and the one we recommend for most rounds. The investor converts at the lower of the cap price and the priced round's price.
Discount, no valuation cap. The investor gets a discount off the priced round's price, commonly 10% to 20%, with 20% the most common. This form is the most founder-friendly on paper because it doesn't put a number on your company, but it's rare. Most investors won't take uncapped risk, because if your next round is priced high, an uncapped SAFE converts at a high price too.
MFN, no cap and no discount. The investor gets the right to adopt better terms you give later SAFE investors. It's useful for small, early checks when you can't agree on a cap yet. We cover MFNs below.
YC no longer publishes a form with both a cap and a discount. Some investors still ask for both. Combining them means modifying the YC form, so we advise picking one version, and the cap form is the market default.
You may still be sent the older pre-money SAFE, or an investor's own document called a "SAFE." The pre-money SAFE measures the cap before the SAFE money comes in, so each new SAFE dilutes earlier SAFE holders as well as founders, and nobody's ownership is easy to predict. If an investor sends one, ask to switch to the post-money form, or at least model the conversion before you sign. With a non-YC "SAFE," compare it line by line against the YC form. We regularly see custom versions that slip in pre-money conversion, extra liquidation preferences or even a maturity date.
YC also offers a free Send a SAFE tool on its site that generates the YC form, collects signatures and sends it to investors. It's a reasonable way to paper a standard SAFE. It doesn't replace the board approval, the investor questionnaire or the dilution modeling described below. YC also publishes cap-only forms for companies formed in Canada, the Cayman Islands and Singapore; if your company isn't a US corporation, talk to a lawyer licensed where it was formed.
The SAFE converts at an "Equity Financing," which the form defines as a bona fide financing in which the company sells preferred stock at a fixed valuation. There's no minimum size. Any priced preferred round counts, whether it's a Series Seed or a Series A.
SAFE holders receive the same series of preferred stock as the new investors, with the same rights. That means when you negotiate the priced round's terms, such as the liquidation preference, protective provisions and board composition, you are setting them for your SAFE holders too. One technical point: when a SAFE converts at its cap, the YC form issues "Safe Preferred Stock," a sub-series whose liquidation preference is based on the lower price the SAFE holder actually paid, not the new money price. That keeps SAFE holders from getting a preference bigger than their investment.
A valuation cap is the maximum valuation at which the SAFE converts. In the YC form, the conversion price at the cap (the "Safe Price") is:
Safe Price = Post-Money Valuation Cap ÷ Company Capitalization
"Company Capitalization" is a defined term in the SAFE, measured immediately before the priced round. It includes all issued and outstanding shares, all outstanding and promised options, the unissued option pool, and all "Converting Securities," which means this SAFE and every other SAFE and convertible note. Because it counts every SAFE as already converted, the math simplifies to the point of the post-money SAFE:
SAFE ownership just before the priced round = Purchase Amount ÷ Post-Money Valuation Cap
A $500,000 SAFE on a $10 million post-money cap buys 5% of the company, measured just before the priced round's new money. The new investors then dilute everyone, SAFE holders included.
Note that Company Capitalization is the SAFE's own measuring stick. It isn't the same as your fully diluted share count, which counts issued and outstanding shares, the full option pool and warrants, and doesn't count SAFEs or notes. See Authorized, Outstanding and Fully Diluted Shares.
There's one important exclusion. If the priced round's investors require you to increase the option pool as part of the round, the YC form leaves that increase out of Company Capitalization (unless your promised options already exceed the existing pool). The effect: the SAFE holder's share count is locked in before the pool top-up, so the new pool shares dilute the SAFE holders along with the founders. It's one of the most misunderstood features of the post-money SAFE, and it matters when you negotiate the pool size in your priced round. See Negotiating an Option Pool.
In a discount SAFE, the investor converts at the priced round's price per share less the discount. The form expresses this as a "Discount Rate" equal to 100 minus the discount, so a 20% discount appears in the SAFE as 80%. If new investors pay $1.00 per share, a SAFE holder with a 20% discount converts at $0.80.
At the priced round, compare the cap price with the round price (or the discounted round price, if there's a discount). The SAFE holder converts at whichever price gives them more shares.
If the round's valuation is above the cap, the cap does its job: the SAFE holder converts at the lower Safe Price. This is the outcome everyone hopes for, because it means the company grew. If the round is at or below the cap, the cap doesn't help the investor, and the SAFE converts at the round price (or the discounted round price, if the SAFE has a discount). Either way, there are no other cases to memorize.
Say your company has 8,000,000 founder shares and a 1,000,000-share option pool, for 9,000,000 shares before any SAFEs. You raise one $500,000 SAFE on a $10 million post-money cap. Then you raise a $3 million seed round at a $15 million pre-money valuation.
The SAFE holder must own 5% of Company Capitalization, so Company Capitalization is 9,000,000 ÷ 0.95, or about 9,473,684 shares. The Safe Price is $10,000,000 ÷ 9,473,684, or about $1.0556 per share, and the SAFE converts into about 473,684 shares.
The seed price is $15,000,000 ÷ 9,473,684, or about $1.5833 per share, so the seed investors buy about 1,894,737 shares for $3 million. The SAFE holder paid about two thirds of what the seed investors paid per share.
Now suppose the seed investors also require you to add 500,000 shares to the pool before the round. Under the YC form, the SAFE's share count doesn't change. The seed price falls to about $1.5040 because the pre-money share count now includes the new pool shares.
| Holder | No pool increase | With 500,000-share pool increase |
|---|---|---|
| Founders (8,000,000 shares) | 70.4% | 66.8% |
| Option pool | 8.8% | 12.5% |
| SAFE holder (473,684 shares) | 4.2% | 4.0% |
| Seed investors | 16.7% | 16.7% |
The founders and the SAFE holder both absorb the pool increase. The seed investors don't, which is why investors ask for the increase to happen before the round. If you want to play with your own numbers, YC's site has a SAFE calculator, and your lawyer should build a pro forma cap table before you sign the term sheet.
Read how the term sheet defines the pre-money share count. Most priced-round term sheets count the shares your SAFEs convert into as part of the pre-money, so the new investors get their full percentage and the SAFE conversion comes entirely out of the existing holders. That's what our example assumes. It's market practice, not a rule of law, so model it early and know what you're agreeing to.
Because the post-money cap counts every SAFE as already converted, each new SAFE comes entirely out of the founders' share. Earlier SAFE holders keep their percentage. Here's a simplified stack, ignoring the option pool:
| Step | Founders | SAFE 1 | SAFE 2 | Seed investors |
|---|---|---|---|---|
| Start | 100% | |||
| SAFE 1: $250,000 on a $5M post-money cap | 95% | 5% | ||
| SAFE 2: $500,000 on a $10M post-money cap | 90% | 5% | 5% | |
| Seed: $3M at a $12M pre-money valuation | 72% | 4% | 4% | 20% |
Each SAFE looks small on its own. Together with the seed round and a pool top-up, they can take a much bigger bite of the founders' ownership than anyone expected when the first SAFE was signed. That's not necessarily bad. Raising capital is how you build value, and a smaller share of a bigger company is the goal. See Equity Dilution: How It Works in Startups. But you should know the number before you sign each SAFE, not after.
The valuation cap is usually the most negotiated term in a SAFE. The cleanest way to set it is to work backward from dilution. Decide how much of the company you're willing to sell in this round, then divide the amount you're raising by that percentage. If you're raising $1 million and are willing to sell 10%, that's a $10 million post-money cap. Then sanity-check the result against current market data for your stage and sector.
Don't let anyone treat the cap as your company's valuation. It's a ceiling on the conversion price, not an appraisal, and it doesn't set the price of your next round. That said, the market does read it as a signal, and a cap that's much higher than what you can later raise at means your next round is priced below it, which can make the step from SAFE to seed look flat.
A cap that's too low has the opposite problem: if your seed round is priced at twice the cap, your SAFE holders buy at half price and the founders absorb the difference. Early investors deserve to be rewarded for early risk, but the reward should be proportionate. Raising a smaller amount on SAFEs is often the best lever you have. See Valuation Cap: What It Is and How to Set One on a SAFE.
You can also give different investors different caps, for example a lower cap for the first checks and a higher one as the company makes progress. That's legal, because each SAFE is a separate contract. Just track it, and watch for MFN holders.
A most favored nation (MFN) clause lets an early investor adopt better terms you later give other SAFE or convertible investors before the priced round. The YC MFN form has no cap and no discount of its own. If you later issue a SAFE with a cap, a discount or other better terms, you have to tell the MFN holder, and they can elect to amend their SAFE to match.
For example, an angel puts $25,000 into your company on an MFN SAFE while you're still finding product-market fit. Six months later, a lead investor puts in $1 million on a $12 million post-money cap. You send the angel the new terms, and they can elect to convert their MFN SAFE into a $12 million cap SAFE.
The MFN is a useful tool when you're taking small early checks and don't want to set a cap yet. The cost is flexibility. Whatever terms you give later investors, MFN holders can take too, so a sweetener for one new investor becomes a sweetener for everyone holding an MFN. Price later SAFEs knowing the MFN holders will follow, and keep a list of who has an MFN so you remember to send the notice.
A side letter is a separate agreement that gives one SAFE holder extra rights. YC's standard side letter grants pro rata rights: the right, but not the obligation, to buy a share of the priced round in which the SAFE converts, sized to the ownership the SAFE converts into. The right ends when that round closes, so it doesn't carry forward to later rounds unless the priced-round documents grant it. Pro rata for larger checks is normal, and most founders agree to it. Just remember that pro rata allocations come out of the same round your lead investor wants to fill, so know who holds them before you negotiate the round size.
Be more careful with side letters that go further: information rights, board observer seats, approval rights or special economics for one investor. Each one is a promise you have to track and honor, and your priced-round investors will ask to see every side letter during diligence. Pro rata yes; a list of extras, only with a good reason and your lawyer's review.
You may hear advice to rewrite the post-money SAFE before you use it: change the math so later SAFEs dilute earlier holders, go back to convertible notes, or draft your own friends-and-family or "super MFN" versions. Those arguments usually start from a fair point about economics. We still advise against them.
The standard is a standard for a reason. Everybody knows what the YC SAFE is. Investors sign it quickly because there's nothing to review beyond the amount and the cap, and nobody spends time or legal fees negotiating the form. When the priced round comes, everybody knows how it converts on the back end. Your lead's counsel can check the conversion quickly because every SAFE says the same thing, so conversion is cleaner, smoother and quicker, and diligence is easier. The YC form itself states that the parties haven't modified it except to fill in blanks, so a changed SAFE is a flag someone has to investigate.
A modified SAFE gives up those advantages. Each one has to be compared line by line against the standard form, at the moment you most want the round to close. Holders on different versions can disagree about how they convert, and that dispute tends to surface just before closing. Some investors will ask for something in return, or pass. And the economic problem a custom form tries to solve usually has a simpler answer. If stacking is the worry, raise fewer and larger SAFE rounds, set each later cap knowing earlier holders aren't diluted, and price the round sooner.
So keep the form and handle the deal points around it. Pick the YC version that fits the deal, cap, discount or MFN. YC doesn't publish a form that blends a cap and a discount, so blending them means modifying the form, and a side letter that changes how a SAFE converts is a modification in substance. Give pro rata on a cap SAFE through YC's standard side letter. Put anything else you've genuinely agreed in a short side letter, and put any limit on total SAFE money in your board consent. Then every SAFE in your stack converts the same way.
Keep the SAFE itself unmodified, so every SAFE converts the same way and your priced-round investors (and their lawyers) can review them quickly. The YC form even includes a statement that the parties haven't modified it except to fill in blanks.
If an investor wants a cap on the total amount you'll raise on SAFEs, put it in your board consent rather than the SAFE. Decline liquidation multiples (such as a 2x return on a sale) and anti-dilution protection in a SAFE. Those are priced-round terms and belong in priced-round negotiations, if anywhere. See Anti-dilution: What It Is and How It Works.
Not every SAFE converts in a priced round, and the SAFE spells out what happens if something else comes first.
Sale or IPO. If the company is acquired or goes public before the SAFE converts, a "Liquidity Event" in the form, the SAFE holder gets the greater of their purchase amount back or what they would receive if the SAFE had converted into common stock at the cap. If the sale is a good one, the SAFE holder shares in the upside. If it's a modest one, they get their money back ahead of the common stockholders, to the extent the proceeds allow.
Dissolution. If the company winds down, the SAFE holder is entitled to their purchase amount, to the extent money is left. In both cases the YC form says the SAFE operates like standard non-participating preferred stock: junior to debt and creditor claims, on par with other SAFEs and preferred stock, and ahead of common stockholders. See How Do I Shut Down My Startup?
A SAFE that never converts doesn't simply vanish. Founders sometimes assume a SAFE is a gift if things don't work out, and that's not what the document says.
A SAFE round needs less paperwork than a priced round, but not none. You'll need a board consent approving the SAFE form, the maximum amount you'll raise on SAFEs and the cap (or caps). Each investor signs the SAFE and completes an accredited investor questionnaire, and you add side letters only where you've agreed to them. Make sure each SAFE is funded: a SAFE that's signed but never paid shouldn't be on your books. See What Comes After Fundraising?
Then keep a one-page SAFE schedule: each holder's name, the date, the purchase amount, the cap, any discount, whether it has an MFN, and any side letter. On your cap table, track SAFEs on a separate tab from issued stock, since they aren't shares yet. When your priced round comes, this schedule is the first thing your lead investor's counsel will ask for, and it's the input for the conversion math.
For most pre-seed rounds, the post-money SAFE is the right tool. SAFEs also show up after a priced round, as a quick bridge to the next one. The math works the same way, but check your charter and investor agreements first, because protective provisions often require preferred approval before the company issues new convertible securities. Convertible notes still show up, especially with some angel groups and outside the major startup hubs, and they add interest and a maturity date. A priced round makes sense once you're raising enough money, usually a seed round of a few million dollars, that a lead investor wants preferred stock and a board seat. See SAFE vs. Convertible Note vs. Priced Round, our Founder Guide: Convertible Notes and our Founder Guide: Seed Round. And before you raise, our guide to avoiding legal startup mistakes covers the clean-up investors will look for. If you're organized as a public benefit corporation, the SAFE works the same way.
The SAFE is designed to get money into your company quickly and simply, and most of the time it does. Where founders get hurt is in the cap, the stack and the side letters, which are exactly the parts worth a second set of eyes. This guide is education, not legal advice. If you'd like help setting up your SAFE round, modeling conversion or reviewing an investor's SAFE, see our SAFE service or contact us. We're rooting for you.
