What is a SAFE and how does it work?
Short Answer
A SAFE (Simple Agreement for Future Equity) is a short, investor-friendly contract where an investor gives money now in exchange for equity at a future financing event — it is not debt and has no interest or maturity date.
Full Explanation
The SAFE was created by Y Combinator to simplify early-stage fundraising. It works like this: an investor provides capital (say £100K), and in exchange receives a SAFE agreement. The SAFE does not immediately create equity — instead, it converts to equity at a future qualifying event, typically when the company raises a priced round (Series A). The conversion is based on a valuation cap (say £5M) and optionally a discount (say 20% off the Series A valuation). If the Series A values the company at £6M, SAFE investors convert at the lower of the cap (£5M) or the discounted Series A price (£6M × 80% = £4.8M), receiving more shares than they would have at the full £6M. If the company exits before a Series A (through acquisition or IPO), the SAFE either receives cash (on a pro-rata basis), converts to common stock, or simply expires with no equity. SAFEs are faster and cheaper than convertible notes because they eliminate loan terms (interest, maturity) and legal complexity. For founders, SAFEs allow rapid early-stage fundraising without committing to a valuation. For investors, they are equity-lite, high-risk instruments suitable for very early-stage companies.
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