What should I know before I sign a SAFE?
FundraisingSAFEsEquity
A SAFE is a promise to issue shares later in exchange for money now, and almost everything that matters about one is in four places: the form, the cap, the discount, and any side letter that came with it. Y Combinator publishes four versions of the post-money SAFE. One has a valuation cap, one has a discount, one has both, and one has neither and instead carries a most favored nation clause. Read the title page to see which you have been handed, because the economics of each are different, and then read the cap.
The post-money cap, and why it fixes a percentage
Since 2018 the standard form has been the post-money SAFE, and the cap in it is a post-money valuation cap. That phrase does a lot of work. Under the older pre-money SAFE, all the SAFEs converted together and diluted each other, so no investor knew their percentage until the round. Under the post-money form each SAFE converts as if it were the only one: an investor who put in $250,000 at a $5 million post-money cap owns 5 percent of the company immediately before the priced round, whatever else was sold. That certainty is why investors like it. The consequence for founders is that every additional SAFE comes out of the founders' share and nobody else's, so a company that sells $1.5 million of SAFEs at a $5 million cap has given away 30 percent before a single share of preferred stock is priced.
Discount, MFN, and the one-or-the-other rule
A discount converts the money at a percentage below the round price, commonly 10 to 25 percent. A SAFE with both a cap and a discount converts at whichever gives the investor the lower price, never both. The MFN version has no cap and no discount; instead, if the company later sells a SAFE or note on better terms, the MFN holder can take those terms. It is used when neither side wants to set a number yet, and it means the first real cap you negotiate becomes the MFN holders' cap too.
Side letters
The post-money SAFE deliberately leaves out pro rata rights, the right to buy into the next round to keep one's percentage. Investors who want them ask for YC's pro rata side letter, and some ask for more: information rights, a board observer seat, a most favored nation clause on top of a cap. None of this is unusual. All of it is a separate agreement that survives the round, so keep every side letter with the SAFE it belongs to and tell the lawyer running the priced round they exist.
If there is no round
A SAFE has no maturity date and earns no interest, which is the main way it differs from a convertible note. It simply waits. If the company is sold before a priced round, the holder gets the greater of their money back or the shares they would have converted into at the cap. If the company shuts down, the holder is paid before the common stock, from whatever is left, which is usually nothing. A SAFE holder cannot demand repayment on a date, and that is the trade the investor made for a simpler document.
Arabella's library carries the post-money SAFE with a valuation cap, the pro rata side letter, and the board consent that approves a SAFE round. Board approval is not optional: a SAFE is an issuance of securities and the board has to authorize it.
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Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.