Primer on SAFEs

The not-so-simple SAFE…

The Simple Agreement for Future Equity (SAFE) is the most prevalent structure we see for early stage fundraising.

What makes them simple?

The agreement itself is short and to the point. As a standard form that’s been generally accepted by the market, there isn’t much that needs to be negotiated by the parties. The due diligence involved in this kind of financing is typically very light. SAFEs don’t require much formality in terms of closing and they are often done with little to no lawyer involvement (which typically makes them dramatically cheaper than the alternative fundraising options available). Finally, because you’re not selling shares at a fixed price, you don’t need to set your valuation at a time when it feels like throwing spaghetti at a wall. For early stage companies with tight budgets and little to show yet, the SAFE becomes a very compelling way to get cash in the door.

And yet – as legal counsel to high-growth companies, we spend a significant amount of time answering questions from entrepreneurs about SAFEs and how they actually work.

Why would that be if they’re so … simple?

In short – they’re not actually that simple or intuitive in practice. While entrepreneurs may find them simple to enter into (with a quick exchange of signatures and cheques), they’re functionally more complex in their outworking of rights and entitlements.

This Primer was built to answer the FAQs we regularly get from entrepreneurs about SAFEs.

What is a SAFE?

A SAFE is an agreement that allows companies to receive investment today in exchange for a promise to provide equity (aka shares) of the company to the investor in the future. SAFEs typically convert into equity when a company completes a Preferred share financing.

To be clear, the investor does not receive equity today – but a right to receive equity in the future.

Under a SAFE, an investor is not a shareholder, and does not hold any shareholder rights (such as voting rights).

When should I use a SAFE?

Examples of scenarios where the SAFE might work well as a fundraising structure:

Too early for a formal valuation, and you need capital before you can get to the stage of a priced equity round.
Limited budget for legal.
Urgency for a raise, that can’t afford drawn out negotiations, paperwork and closing procedures.
Raising incrementally, cheque by cheque, instead of all at once.
Bridge to your next round.

Is there a limit on how many SAFEs you can issue?

No.

Though you need to consider your compliance with applicable securities laws (talk to your lawyer) and you need to consider that all of these SAFE investors will eventually have shares in your company (which could be a nightmare to manage down the road).

Also, keep in mind that the more SAFEs you issue, the more complex your future equity financing becomes, when these all convert. That complexity can be off-putting to future investors if not well organized and disciplined in advance.

Is there a minimum cheque size that I can take on a SAFE?

No. There is no minimum and no maximum.

However, we recommend setting a minimum investment amount as a policy, for the sake of staying disciplined with your financing. Small cheques might seem helpful when every dollar counts, but it can introduce longer term complexity which can significantly overrun the benefit.

With that said, if you need to take smaller cheques, you might consider having a separate SAFE version for them, and customizing it to remove the SAFE holder’s voting rights on conversion. That way, you don’t end up with a cap table full of very small voting shareholders. In this case, while you have a cap table that is intimidating to future investors on its face, you can at least show that the group is well managed.

When does the SAFE convert to equity?

Under a standard SAFE, the SAFE will automatically convert into equity at the time that the company completes a Preferred share financing.

From time to time, you might see a SAFE that has customized that conversion event to be triggered on any kind of equity financing (not just a Preferred share equity financing) provided that a certain amount is raised on that financing (such as $500,000 in new money). However, this is far less common in market than the standard version that limits the trigger to a Preferred share financing (regardless of amount raised).

In short, if you’re using a standard SAFE, conversion will be on a Preferred share financing.

What is a Preferred share financing and why does this matter?

The standard SAFE converts to shares on a Preferred share financing, so it’s important to know what that is and when you might complete one before you start issuing SAFEs to investors.

Preferred share financings are a form of equity financing, where the company is raising capital in exchange for Preferred shares, at a fixed valuation.

Preferred shares, as their name suggests, carry preferred rights and entitlements when compared to Common shares (the vanilla class of shares held by Founders). There are general expectations of what those rights and entitlements include, as they follow model documents and structures that have been generally agreed in the industry. However, the specific rights and entitlements, and nuances relating to them, are entirely negotiable and vary from transaction to transaction.

Preferred share financings are the complete opposite of a SAFE financing.

They are complex and heavy in terms of documentation. They typically involve robust due diligence. The transaction is primarily driven by the lawyers (which significantly increases costs). The valuation of the company gets fixed after rigorous negotiation. And the rights of investors are comprehensively established.

A company does not typically use this structure until millions are being raised on a single round, and that round is being led by a venture capital fund. It’s also not typically the Founders that volunteer this structure, but the lead investor that directs it.

This is often the first time a fixed price is set for the valuation of a company and its shares – which is why it is the defined event in a SAFE for triggering conversion to shares.

What kind of shares will the SAFE investor receive on conversion?

On conversion under a standard SAFE, the SAFE investor will receive the same class of Preferred shares as the new investors on the Preferred share financing that triggers the SAFE conversion.

The SAFE investor will get the benefit of all of the special rights attached to those Preferred shares which are negotiated by the lead investor of the Preferred share financing.

The SAFE investor will receive a different series of that class of Preferred shares, to distinguish the difference in share price they’re paying when compared to the new investors (or other SAFE investors). Share price matters for calculating liquidation preference.

Ultimately, the class of shares is the same, and the rights attached to those shares are the same. Tey’re simply distinguished by the price paid for those shares as SAFE investors typically get a discount when compared to the new investors on the Preferred share financing.

How many shares will the SAFE investor receive on conversion?

You won’t know for certain how many shares the SAFE investor will receive on conversion until you have determined the details of the Preferred share financing that will trigger the SAFE conversion.

This is because the number of shares is calculated based on a formula that depends on the company’s valuation applicable to that future financing event and the company’s capitalization immediately before that future financing event. The variables are dependent on future data not yet known for certain.

With that said, with the help of your CFO or lawyer, or software solutions like Carta (check out their free SAFE and Note Calculator), you can (and should!) model this out to get a sense of what this will look like.

If the SAFE has a Valuation Cap, you can also calculate a quick implied percent by dividing the investment amount by the Valuation Cap. That will give you a rough estimate of what to plan for with dilution, though the exact percentage will differ when the more detailed conversion math is done.

What benefit is offered to SAFE investors for investing ahead of a priced equity financing?

If a SAFE investment was simply going to convert in the future at the valuation used on that future equity financing, then there wouldn’t be much incentive for the SAFE investor to put their money in now. They might as well hold their money securely until that future equity financing, and invest then.

Some sweeteners are included in the SAFE to recognize investors’ earlier contribution and risk.

There are 2 primary sweeteners considered on a SAFE:

(a) Valuation Cap

The Valuation Cap is the maximum valuation that will apply when calculating the number of shares the SAFE investor will receive upon conversion.

For example, if the Valuation Cap is set at $10M, and the future equity financing has a valuation of $20M, the SAFE investment will essentially convert with the future equity financing as if that event’s valuation is $10M.

(b) Discount

The Discount Rate is the percentage that gets applied to the future equity financing share price to determine the conversion price that will apply for the SAFE investor on conversion.

For example, if the Discount Rate is set as 80%, and the future equity financing results in a price per share of $1.00, the SAFE investment will essentially convert with the future equity financing as if that share price is $0.80 (calculated by multiplying the Discount Rate by that financing share price) - which will yield more shares to the SAFE investors for their money, than that of the equity financing investors.

The SAFE could offer the Valuation Cap, the Discount, or both the Valuation Cap and Discount, as a benefit to the SAFE investor.

How does it work if the SAFE has both a Valuation Cap and a Discount?

The SAFE investment will convert at the calculation that yields the investor more shares (i.e. the better of the two).

In other words, at the time of conversion, you will calculate the conversion based on each of the two options, and ultimately convert the investment at the calculation most favourable to the investor.

The Discount does not get applied to the Valuation Cap, and so the sweeteners are not duplicated.

How do I set the Valuation Cap?

First, it is important to understand that this is not the company’s present valuation.

Confusion around this often trips up negotiations and the process of determining an appropriate cap. If the company was firm on its present valuation, it could simply do an equity financing at that price. One of the initial intentions of the SAFE was to create a form of financing for early stage companies to raise capital when it was premature to set a valuation for the business. So to treat the Valuation Cap as the present valuation, or to negotiate it as such, would be to undermine one of the principal reasons the SAFE was created.

For the investor, the Valuation Cap provides a limit on the dilution they will experience from valuation growth between the date of their investment and the SAFE conversion event. If the future valuation jumps above the Valuation Cap, they remain guarded by the Valuation Cap which will yield them more shares for their money than if they were tethered to the valuation over time.

At the same time, the SAFE investor is going to get the benefit of a lower valuation than the Valuation Cap at the time of conversion, because again, the Valuation Cap is the higher-limit on applicable valuation for conversion, not a fixed present valuation applicable to future conversion. If the Valuation Cap is $10M, and the future equity financing has a valuation of $5M, then the SAFE will essentially convert at $5M, and not the Valuation Cap.

When negotiating this, the most powerful tool for you is market data. Do your research. What are companies at your stage, in your industry, and in your geographic market doing? Platforms like Carta offer free data like this so that you can determine the appropriate ranges to work around:

It’s also helpful to get advice from your lawyer! If they have experience with VC financings, they see a ton of SAFEs (both at the time of their signing and at their conversion) and can give some insight into what’s happening in the market.

And be careful: Setting your Valuation Cap too low can cause dramatic, irreparable damage to your cap table in the future. Don’t cave to the pressure from an investor on this before getting advice and understanding how the decision will affect future fundraising and founder dilution.

How do I set the Discount Rate?

First thing to know, if you have in mind to give a 20% discount on the SAFE, it is critical that you refer to it as a Discount Rate of 80%. The SAFE is not written with reference to the Discount you’re offering (ex: 20%) but the Discount Rate you’re applying to the valuation at the time of the future Preferred share financing (ex: 80%). If you enter 20% as the Discount Rate in the SAFE, the investor will actually receive an 80% Discount!

Typical Discounts range from 10%-20%.

Rule of thumb is set the Discount based on how far out you project the Preferred share financing. If it’s far out (i.e. over a year), the higher end of that range. If it’s closer to (i.e. within a year), the lower end of that range.

Even at the high end of that range though, we haven’t seen any companies experience dramatic, irreparable damage by conceding that. That’s more of a risk with getting the Valuation Cap wrong. The Discount stays tied to the future valuation, so it’s naturally better protected from irreparable impact. Though, don’t go higher than 20% without talking to your lawyer and advisors.

What types of SAFEs are there?

There are a number of versions of the SAFE you can find in market:

(a) Valuation Cap Only – converting at Valuation Cap only

(b) Discount Only – converting at Discount only

(d) Most Favoured Nation (MFN) – no Valuation Cap or Discount on conversion, but moves to better terms if offered to future investors

Typically, all of these SAFEs are the same in substance, apart from the terms that apply to the determination of equity entitlement held by the SAFE investor.

What is a Most Favoured Nation (MFN) SAFE?

A standard MFN SAFE has no Valuation Cap and no Discount. It converts on the same terms and valuation as the future equity financing that triggers SAFE conversion.

However, the MFN feature means that if the company issues any other SAFEs or convertibles in the future, the SAFE investor will have the right to switch their SAFE to those new terms if they are more favourable to the investor.

In our experience, these are most common in bridge-round scenarios where an equity financing is imminent, but a capital bridge is needed ahead of that closing.

Note that occasionally you will see an MFN feature added to a Valuation Cap / Discount SAFE. That is subject to negotiation but not a standard feature.

What’s the difference between a Pre-Money SAFE and a Post-Money SAFE?

The original SAFE, introduced in 2013 by Y Combinator, is now referred to as a “Pre-Money SAFE”.

In 2018, Y Combinator updated the SAFE to a “Post-Money SAFE”, which has since become the market standard.

Pre-Money SAFEs are now uncommon.

The difference primarily relates to the conversion math, and the question of when the SAFE theoretically converts.

Pre-Money SAFE: Converts as if the SAFE investors are participating in the equity financing that is triggering the SAFE conversion. Their money gets treated as part of that financing and they dilute the new investors in the process. As a result, founders experience less dilution because the new investors have absorbed some of that.
Post-Money SAFE: Converts as if the SAFE investors invested in a stand-alone financing prior to the equity financing that is triggering the SAFE conversion (which, let’s face it, is more consistent with the reality). Their money converts to shares immediately before the equity financing, which more heavily dilutes the founders. Then when the new money comes in on the equity financing, the SAFE investors get diluted, and the founders get further diluted.

While Pre-Money SAFEs are more favourable to founders in their dilution impact, the Post-Money SAFE is the standard. It more accurately reflects the reality that a SAFE financing is its own financing event, and that it shouldn’t dilute future investors.

How do you tell whether it’s a Pre-Money SAFE or Post- Money SAFE?

We’ve seen a lot of entrepreneurs take Pre-Money SAFEs and simply change the title of the agreement to “Post-Money” and add “Post-Money” before the Valuation Cap definition. This does not change a SAFE from being Pre-Money to Post-Money.

The change is primarily in the definition of “Company Capitalization” – the calculation that determines the point in time for which the conversion is to be calculated.

If in doubt, ask your lawyer. Most tech lawyers in Canada give away Canadianized Post-Money SAFEs for free that have been vetted by them, so there shouldn’t be any reason for making this mistake.

What happens to a SAFE if you don’t do a Preferred share financing?

In short, it remains a SAFE.

While that means the SAFE investor isn’t a shareholder, the SAFE protects the investor’s rights in a number of ways, including:

Ensuring that any dividends paid by the Company get paid to them also, as if they were a shareholder.
Ensuring priority repayment in the event of a dissolution.
Ensuring preference of repayment and participation in an acquisition or liquidation event as if they were a shareholder.

What happens to a SAFE if the Company fails or dissolves before it converts?

In a dissolution event, the typical distribution order of remaining proceeds is: (1) creditors, (2) Preferred shareholders, and (3) Common shareholders.

If the company fails and goes through a dissolution event, the SAFE investor is essentially treated as if they had become a Preferred shareholder immediately prior to that dissolution.

That puts them after creditors, but ahead of any Common shareholders in the distribution of those proceeds (which is where the Founders typically are). They are on par with other SAFE investors and Preferred shareholders, and share pro-rata with the SAFE investors and Preferred shareholders, up to their investment amount (i.e. to get their money back).

In other words, it puts them in the same place as they would be if they had already converted to Preferred shares.

What happens to a SAFE if the Company gets acquired before the SAFE converts?

The SAFE investor will essentially be entitled to the better of:

Their money back (in the same order as a dissolution); or
Their percent of the acquisition value as if their SAFE converted immediately prior to the acquisition.

This gives the investor down-side protection and priority if the company is acquired at a low valuation, and up-side participation if the company is acquired at a high valuation.

How is a SAFE different from a Convertible Note?

In short, a SAFE is not written as or intended to be a debt instrument; whereas a Convertible Note is.

Both SAFEs and Convertible Notes have a lot of similar features otherwise – including the right to convert to shares.

However, Convertible Notes are not all created equal and don’t have the same level of standardization as SAFEs do. There are as many versions of Convertible Notes as there are lawyers, and this makes them more involved to negotiate and align expectations. With that said, organizations like CVCA have established a standardized Convertible Note form for public use; however, it is for “Secured Debt”, which should not in any event be considered without speaking with your lawyer.

Can I set different Valuation Caps for different investors?

Yes.

There’s nothing in a SAFE that requires you to have the same terms for each investor. You could theoretically have each investor on different terms.

With that said, it looks very unorganized and might upset investors that are left behind on more favourable terms.

Best practice is to align all of the SAFEs on a single round to the same terms, so that you can group those participants together as a single round on your cap table and for future conversion. If any special terms are being offered to an investor because they are, for example, putting in more money than the others, you might see them get a Side Letter containing the special rights, but the SAFE itself would likely stay the same as the others.

What is a Side Letter?

A side letter is a side agreement between an individual investor and the company, which provides that investor with special rights that might not be more broadly offered to everyone else.

This may be expected if the investor is putting in a more significant cheque or if the investor is a venture capital fund, institutional investor or strategic investor.

Discuss side letters with your lawyer before putting one in place to ensure its use makes sense for your stage and for the investment size.

What might be in a Side Letter?

The basic Side Letter template offered by Y Combinator includes Pro Rata Rights only (i.e. a right to participate in future financings).

However, the bigger the cheque and more substantial the investor, the more extensive the requests may be for the Side Letter.

Side Letters can include things like:

Information Rights
Decision Making Rights
Most Favoured Nations Rights
Board Observer Rights
Special Rights relating to the future Preferred share financing

If these are requested, discuss them with your lawyer before putting them in place to ensure they makes sense for your stage and for the investment size.

What approvals do I need before issuing SAFEs?

At minimum, you’ll need Board approval.

You may additionally need shareholder / investor approvals in order to satisfy any special approval rights they might have.

Check with your lawyer what’s needed in your case.

Can I raise using both SAFEs and Convertible Notes or Priced Equity at the same time?

Yes.

There’s nothing in the SAFE that restricts you from concurrently raising capital under other structures.

However, it shows better organization and fundraising discipline if you’re keeping the terms generally consistent on a given round for all investors. That tells a better fundraising story and will also make future SAFE conversion simpler.

How do SAFEs impact a Preferred share financing?

SAFEs convert into shares on a Preferred share financing, which means that the SAFEs and the SAFE investors are involved in that transaction.

The more SAFEs you have, the more people and conversions you need to deal with. And if you have multiple SAFEs on different terms, you’ll have more complexity with the conversion calculations and paperwork. These things simply increase the work involved, and the legal fees, for closing the Preferred share financing.

Do SAFEs show up on my cap table?

SAFEs don’t show up on your cap table in the same way that equity (whether shares or options) does.

Because SAFEs represent a future right to equity, there is no actual equity ownership today to represent. And until the actual conversion event, you don’t yet know exactly how many shares each SAFE will convert into.

However, your investors and prospective investors still want to see your SAFEs (and other convertible securities) represented, as they can have a significant impact on your cap table down the road.

You can track SAFEs separately in a side schedule when preparing a present cap table. This will list each SAFE and the key details (i.e. Valuation Cap, Discount Rate) about them for calculating conversion when the time comes.

Additionally, most companies prepare pro forma cap tables, which don’t just show today’s cap table, but also model out the cap table immediately after a hypothetical Preferred share financing. In this kind of cap table, the SAFE investors would be represented with share ownership since this model provides all the information needed to calculate its conversion.

Can I buy back SAFEs or renegotiate terms later?

Short answer: yes – you can buy back SAFEs and you can renegotiate terms later – as long as the SAFE investor consents.

Ultimately, the SAFE is just a contract between two parties. So if the two parties agree to amend or change that contract in any way, then they have the right to do that. You would put together an Amending Agreement to outline the changes.

Before doing this though, ensure you’re discussing the proposal with your lawyer. There may be approval requirements or restrictions around this that exist in your shareholders’ agreement, articles / by-laws, or an investor rights agreement.

Can I convert SAFEs before a Preferred share financing?

Short answer: yes – you can early convert a SAFE prior to a Preferred share financing – as long as the SAFE investor consents.

Some companies work with their SAFE investors to initiate an early conversion of all the SAFEs issued by the Company in order to clean up the cap table prior to a Preferred share financing. Since an early conversion is essentially an override to the standard terms in a SAFE, this is done as an amendment to the SAFE.

The parties can agree to the terms for that early conversion, and can even agree to convert the SAFE to Common shares (instead of Preferred shares) and at a specified price.

Again, there’s lots of room for flexibility around this, as long as the SAFE investor consents to the changes.

How do I educate my investors about SAFEs?

While SAFEs are widely used and the dominant form of early stage financing, it is not uncommon to run into angel investors or friends and family investors who don’t understand them.

Here are some tips for how to educate your investors about SAFEs:

1. Start with the basics, and explain in simple terms what the SAFE is and how it works. Feel free to grab from this Primer when doing that, or pull from the many articles available online.

2. Explain the key terms applicable to the SAFE you’re offering. With the basics covered, explain what terms (e.g. Valuation Cap and/or Discount) you’ve set for the SAFE offering, and what that means for the investor.

3. Build and share a Pro Forma Cap Table. Confusion and fear with SAFEs often come from the fact that the investor doesn’t get shares immediately, and the number of shares they’ll get in the future isn’t yet known with certainty. To address this, consider building and sharing with them a Pro Forma Cap Table that models out a future equity financing, so that they can see how many shares they’d end up with as a result of this SAFE. You can work with your lawyer to prepare a Pro Forma Cap Table to share.

4. Prepare to answer FAQs. People have common questions about SAFEs (many of which are covered by this Primer), which would be good to prepare answers for. You can share this Primer, work with your lawyer in the communications, or recommend that they also get their own lawyer (though, in that recommendation, ensure their lawyer is one that works with high-growth companies and is familiar with SAFEs).

5. Share Resources. There are a lot of resources out there to help better understand SAFEs. You could start by sharing the resources available on Y Combinator’s site, where the SAFE is made available (though their User Guide is very long and easy to get lost in if you’re new to this topic).

How are currency differences handled with a SAFE?

If you expect differences in currency between any of the investment amount actually paid, the investment amount stated on the SAFE, the valuation cap stated on the SAFE, or the future valuation used for the Preferred share financing, then you should ensure that there is clarity written into the SAFE about how that should be handled.

The Standard SAFE assumes currency consistency with all variables and events.

Since most of the Preferred share financings we see are on USD, we recommend using USD on the SAFE also, and converting the CAD amounts invested on a SAFE to USD for ease of future conversion.

It might be worth adding a sentence like this to deal with that:

All dollar amounts referenced herein are in lawful currency of the United States of America unless otherwise expressly stated. For purposes of this Safe, the value of the Purchase Amount shall be deemed to be the United States dollar equivalent of the consideration received, and in the case of Canadian dollars received, shall be deemed to be exchanged based on the Bank of Canada indicative rate on the date of _____________, which is _____________.

How do I properly fill out a SAFE?

Quick checklist based on common mistakes we’ve seen (though - chat to your lawyer to make sure it’s been done properly in your case):

Ensure you’re using the latest and Canadian version of the Post-Money SAFE. Most tech lawyers in Canada give away Canadianized Post-Money SAFEs for free that have been vetted by them.
Enter the full legal name of the investor (not a short version of the name).
Enter the investment amount and the currency.
Enter the date of the investment.
Collect the investor’s signature, and wait to countersign it until you receive the actual investment.
Ensure that you have obtained all necessary approvals and that you have obtained from the investor any other paperwork that your lawyer recommends for securities compliance.

What are the tax implications of issuing a SAFE?

We can’t give tax advice and would recommend this question be asked of your tax advisor.

Ink LLP is a business law firm that acts as strategic counsel to high-growth companies and those that build them. Contact one of our lawyers to discuss your business and how our team might be able to help you tackle the challenges of your business and the opportunities for growth.

This information is provided for informational purposes only, is highly generalized, and is not legal advice.

FinancingGeoff DittrichMarch 12, 2025Financing, Cap Table, Venture Capital, Startup

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