Understanding SAFEs

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What is a SAFE?

Simple Agreement for Future Equity
Convertible security
Receive money now, issue stock later
Minimal negotiations
- You decide how much money an investor will put it, and at what negotiation cap
- Actual valuation will be decided in a priced round
Not debt

Main SAFE structure

THIS CERTIFIES THAT in exchange for the payment by [Investor Name] (the "Investor") of $[______________] (the "Purchase Amount") on or about [Date of Safe], [Company Name], a [State of Incorporation] corporation (the "Company"), issues to the investor the right to certain shares of the Company's capital stock, subject to the terms described below

This Safe is one of the forms available at https://ycombinator.com/documents, and the Company and Investor agree that neither one has modified the form, except to fill in blanks and bracketed terms

The "Valuation Cap" is $[_________________]. See Section 2 for certain additional defined terms.

Anatomy of the SAFE

5 pages in length. Split into 5 sections

Section 1 - Events
- Equity financing (company raising money)
- Liquidity event (company selling)
- Dissolution (company closed down)
- Liquidation priority (who comes first in the queue to be repaid)
- Termination
Section 2 – Definitions
Section 3 – company representations
Section 4 – investor representations
Section 5 – legal boilerplate language

Post-Money safes

Pre-money valuation + money raised = post-money valuation

To understand how much of the company is sold:

Founder Ownership = Amount raised / Post-money valuation cap

Different flavors of the SAFE

Capped (valuation is capped)
Discount (you get a %discount on the valuation)
Uncapped (extremely uncommon)
Uncapped with a "most favored nation" clause (can happen if you're raising money early on — but very uncommon too)

Dilution

Assume that – at incorporation – you just have two founders who have split up the equity equally

Next, they raise some money as Post-money safes from two different investors in two different rounds

Investor A:

$200k, $4M post-money valuation cap
Ownership = $200k/$4M = 5%

Investor B:

$800k, $8M post-money valuation cap
Ownership = $800k/$8M = 10%

Dilution for founders = 5% + 10% = 15%

When you raise some cash, you'll probably hire people. When this happens, you'll also likely issue stock + set aside an option pool. Founders will get diluted when this happens. Let's assume that the total number of shares (common shares) are 10,000,000 at this stage

A year after this, you'll have a priced round. Let's say you raise $5M ($4M from the lead investor) at a $15M pre-money valuation for your Series A. So your post-money valuation is $20M, and the target available option pool is 10% of the post-money valuation

In the priced round, 3 things happen:

Safes convert as shares – note that safes are included in the pre-money valuation!
Optional pool is increased
New investors invest

Step 1.

When the safes convert, new shares are first issued to the SAFE investors

Since they have 15% of the company (pre-money), they get an additional 1,764,705 shares (the founders 10M shares stay – dilution comes from the issuing of new shares)

this is transitory. cap-table won't look this this. it's just a step in the calculation

If you raise at a post-money valuation that is lower than the SAFE cap, early investors will have a higher ownership than the 15% at this stage. This is why you shouldn't negotiate a crazy high valuation when getting SAFEs

Step 2.

Option pool increases

In this case, 1.695M additional shares are issued since the target available optional pool is 10% post money and the post-money valuation is $20M

Step 3.

New money invests

Price per share = Pre-Money Valuation / Capitalization
Capitalization = Total fully diluted shares after safe conversion and option pool increase
Number of shares that Series A investors get = investment amount / price per share

In this case, new money capitalization = 10M original shares + 1.76M safe investor shares + 1.695M option pool increase shares = 13.455M

New money price = $15M / 13.455M shares = $1.114

Total new money shares = $5M / $1.114 = 4.48M shares

This is the post money cap table