SAFE note
Simple Agreement for Future Equity: a debt-free alternative to convertible notes from Y Combinator.
Definition
SAFE (Simple Agreement for Future Equity) is a Y Combinator-designed funding instrument that is debt-free; converts to equity at the next priced round. Standard forms: pre-money cap, post-money cap, MFN, no cap/no discount.
Context
More common in C-corp seed rounds than LLCs; LLC SAFEs require careful Operating Agreement drafting.
Example
A startup raises $500K via SAFEs with $10M post-money cap. SAFEs convert to equity at next priced round at the cap or round price (whichever favors investor).
Common pitfalls
- Originally designed for C-corp; LLC version requires careful drafting.
- Securities regulation applies.
- Post-money SAFE vs pre-money SAFE materially differ in dilution.