Simple Agreements for Future Equity: Tips for Early Stage Startups

Originally published June 17, 2024. Last updated August 6, 2026.

Early-stage startups often turn to SAFEs for funding because these cash-efficient instruments are typically flexible, simple to negotiate, and quick to execute for both investor and founder.

Key takeaways

• A simple agreement for future equity (SAFE) is a fast, cheap, and founder-friendly instrument in which an investor provides a startup company with funds that can later be converted to equity.
• With no debt, no interest, and minimal legal complexity, a SAFE offers a cost-efficient way for a startup to raise capital, requiring minimal legal fees when done properly.
• “Post-money” SAFEs, rather than “pre-money,” are now the standard. Knowing the difference at signing can prevent serious disputes later.
• SAFEs do present some risks for all parties: founders face dilution surprises and regulatory obligations, while investors face illiquidity and lack of control over conversion timing.

For many early-stage startups, the need for a capital boost comes long before they’re ready for their first priced equity round. Founders may turn to SAFEs to fill in the gap between bootstrapping and priced rounds.

While a Series A round requires a well-crafted investor pitch deck, extensive negotiation, and significant legal costs, SAFEs offer a simpler, faster, and more flexible source of funding during these crucial early stages.

Although SAFEs eliminate much of the complexity that comes with a priced round, complications can still arise for startups that don’t fully understand the longer-term implications of these convertible securities.

At a RBCx webinar for early-stage founders, we spoke with Elizabeth Yin, co-founder and GP at Hustle Fund, and Konata Lake, head of Torys Emerging Company and Venture Capital Group at Torys LLP, to glean their insights on what founders need to know when considering SAFE investments.

What is a simple agreement for future equity (SAFE)?

A simple agreement for future equity (SAFE) is an agreement between a company and an investor in which the investor provides funds that can later be converted to equity. In return for the capital it provides to the company, the investor receives a right to future equity, typically when a triggering event occurs, such as a priced funding round, acquisition, or IPO.

Even though the investor provides the startup SAFE funds today, it doesn’t receive an ownership stake until the company does a priced round.

“Basically, it’s saying: we’ll deal with the equity later,” says Yin.

The SAFE was first introduced by Y Combinator in 2013, and the YC template for a SAFE remains the industry standard.

“Ideally, what we do when we get to a SAFE is we compare it to the YC form,” explains Lake. “If it’s very close, and there’s just minor changes, we should be able to look at a SAFE in less than an hour and give you small comments. If it’s going to take us longer, then you’ve got a document that isn’t really doing what a SAFE is supposed to do.”

As tech startups continue to navigate a tough economy, they’re increasingly being forced to prioritize cash efficiency over growth, making SAFEs an ideal instrument. The simple and standardized nature of a SAFE helps curb legal costs, which is particularly helpful when financing smaller rounds. SAFEs are therefore most common in the seed and pre-seed financing rounds.

“We actively work with our clients to keep costs down, to allow the company to be successful, to grow and have everyone benefit from a much larger, more successful company,” says Lake. Much of the process is automated, he adds, which saves on costs.

“We have a document generator system that will answer a few key questions and then we generate a SAFE. It’s more efficient. We try to minimize the cost to the extent we are involved in a SAFE.”

How a simple agreement for future equity (SAFE) works

Once an investor and a startup agree to a SAFE, the agreement is signed and the investor provides money to the company via cheque or wire transfer. The company can then use this money right away for its operational purposes.

A SAFE isn’t a loan, so there is no interest charged and no maturity date; nor is it equity, since no shares are issued immediately and no valuation of the company is set. The SAFE is simply recognized as a formal future obligation on the company’s part.

Typically, nothing significant happens with the SAFE until a triggering event occurs, such as a priced funding round, acquisition, or IPO. In such an event, the SAFE converts into equity, i.e., transforms into actual shares for the investor.

This conversion is typically at a discount or favorable valuation cap, which is essentially a ceiling on what the company can be valued at before an investment converts to shares. If the company grows significantly before a priced round, the investor receives more shares because their conversion locks in at this lower valuation.

Events that can trigger this conversion include:

• Priced equity round: This is a fundraising event in which a company and its investors agree on a specific valuation for the company, with new shares issued at a defined price per share based on that valuation. When this happens, the SAFE converts into the same class of shares as the new investors in that round, at the method that provides the investor the greatest number of shares (via either the valuation cap or discount method — see below).
• Acquisition or change of control: This can include the sale of a significant amount of the startup’s voting shares or assets, a merger with another entity, or, in some cases, the licensing of a company’s core IP (intellectual property). In these situations, the investor can choose to either receive their investment back as cash or have it converted to equity at the valuation cap price before such a deal closes, whichever offers a more favourable outcome.
• Initial public offering (IPO): If a company undertakes an IPO, the SAFE can convert into shares for the investor, typically at a predetermined price based on the cap.
• Dissolution: In the event that a company shuts down and its finances are settled, SAFE holders are repaid before equity holders but after creditors.

How a SAFE investment converts into shares

A key component of a SAFE is precisely how the investment will convert into shares. There are two ways by which this is determined: the valuation cap method or the discount method. In some instances, the SAFE will include both methods, allowing the investors to receive the better result of the two and to help ensure the risk they take on will be compensated with the optimal financial outcome.

What is the discount method?

In the discount method, the amount invested converts upon the priced round at a discount, typically between 5% and 20%. This discount reduces the share price they pay compared with later investors, thereby compensating the SAFE investor for bearing early-stage risk.

For example, if the Series A price per share is $10 and the discount rate is 20%, the investor will convert their SAFE investment into preferred shares at $8 per share. In this scenario, this investor pays a bit less than those coming in on the priced round, and in return for its early investment receives more shares and a higher ownership stake.

“If you’re raising today and you’re going to do a priced round in a couple of years, chances are your company will increase in value,” Lake says. “Simply by giving a 10%, 15%, or 20% discount off of the priced round puts the founder in a better position than a valuation cap that may give the investors a bit more of the upside.”

It can be a bit of a guessing game, he admits, but a simple discount rate is an easy way to structure a SAFE from a founder’s perspective.

What is the valuation cap method?

In the valuation cap method, the investor and founder agree to calculate the SAFE conversion price based on a valuation limit that will be less than what is expected on the first priced round. For example, if the company today is worth $3 million and is looking to raise when it’s worth $10 million, the SAFE can have a valuation cap of $5 million.

“The investor then gets the benefit of that delta between the five and 10,” says Lake. “Investors will convert at that valuation and hopefully accrue some benefit between that valuation cap and what the actual priced round valuation is.”

“It’s a give-and-take in terms of that discussion with investors around what is the valuation cap or discount. The thinking is that a shared risk should include shared upside.”

When determining which of the two methods is better, founders should consider the high level of risk investors take on when funding a pre-seed or seed stage startup.

“It’s a give-and-take in terms of that discussion with investors around what is the valuation cap or discount,” says Lake. “The thinking is that a shared risk should include shared upside.” This is why some investors prefer a SAFE that offers the better of a valuation cap or discount.

“Meaning when you run the math, whichever gives me the lowest share price, that’s the one I get. The higher the price [per share], the less I get of the company.”

When to use the discount cap method vs. the valuation cap method

The choice of which of the two methods to use rests largely on how much the company’s valuation is expected to grow before the priced round, and whether the founder or the investor will bear most of the negotiating risk.

The discount method makes more sense when a company’s valuation is difficult to predict and the founder is looking to avoid locking in too high a cap (thereby giving too much away to investors). A flat discount (typically 10%–20%) is predictable and founder-friendly: if the company grows significantly in value, the founder will be giving away less than they would under a low valuation cap.

The valuation cap method might be appropriate when an investor is looking for greater upside protection and the company’s trajectory suggests strong future growth. The cap rewards investors by converting at a lower share price if the company’s valuation rises well above the cap. The greater the gap between the cap and the priced round valuation, the better the return for the early investor.

In practice, many SAFEs include some version of both methods. Often, the investor converts using whichever method produces the lower price per share, which in turns results in them receiving the greatest possible number of shares. This structure reflects the principle that early risk should come with higher reward.

However, founders should take caution and model the outcomes of both scenarios before entering an agreement, as strong company growth can potentially result in greater dilution than they might be expecting.

When determining the valuation cap, it’s also important for both parties to clarify whether it’s based on a “pre-money” or “post-money” SAFE, as that will determine the share price on conversion.

Post-money vs. pre-money SAFEs

In 2018, Y Combinator revised the standard SAFE to a “post-money” structure. This is an important change, intended to benefit both founders and investors.

Pre-money SAFE

In the previous, “pre-money” structure, the investor’s percentage of ownership was calculated before accounting for other SAFEs converting. The company capitalization did not include the shares issued upon conversion of the SAFE. Since the conversion price does not take into account other SAFEs issued by the company (which can dilute the percentage ownership of all other SAFEs), this resulted in founders often underestimating the total dilution in situations where multiple SAFEs were outstanding, and thus how much of the company they would own upon conversion.

“You have to wait to see the math and how it shakes out,” Lake says of this type of scenario. “You don’t know how much ownership you have in the company because it’s dependent on how much money is raised on various pre-money SAFEs.”

Post-money SAFE

With the current “post-money” standard, the investor’s ownership percentage is measured after all the SAFE money is accounted for but still before the new money in the priced round that converts and dilutes the SAFEs.

For a post-money SAFE, the company capitalization includes all shares issued upon conversion. Since the shares that will be issued upon SAFE conversion are included in a company’s capitalization, they are taken into account at the time of conversion, so the dilution is borne by the founders, not the investors.

“An investor knows how much ownership they have, even if the post-money SAFE doesn’t convert for two years, five years, even 10 years,” says Lake.

For this reason, post-money SAFEs are now the standard. If a founder has multiple SAFEs with different valuation caps, the stakeholders still know their ownership stake based on the document.

The purpose of this revised method is to give both the investor and the founder greater clarity on exactly how much dilution is occurring and how much ownership of the company has actually been sold.

Lake recommends both parties always be clear on whether a SAFE is pre-money or post-money.

“It’s really important because when you do the math, there’s quite a dramatic difference. If the founder is thinking it’s a pre-money valuation cap but the investors think it’s post-money, that can create confusion and not a great situation.”

Determining the startup valuation

Determining a company’s valuation can be challenging for an early-stage startup. Yin suggests thinking about valuation in terms of supply and demand: the demand from investors and the supply of your round. A founder with multiple interested investors has more leverage to drive up the valuation than does a founder with only one or two interested parties.

Founders can also figure out the dynamic of their supply and demand by testing the waters with a few investors by simply asking for their opinion.

“Go out and say, ‘I’m not raising right now, but I would love to get your feedback because I’m thinking about raising soon. What sort of valuation do you think something like this might fetch?’” advises Yin. “The investor will probably give some sort of range to give you a sense [of your company’s worth].”

Alternatively, she recommends raising a very small tranche on favourable terms, gauging the ease with which it is filled to adjust your valuation cap as needed.

Managing multiple SAFEs

Startups can run into challenges when they have multiple SAFEs that don’t connect to one another, particularly before their Series A round.

“One of the issues I see is companies issuing SAFEs that don’t connect to each other,” says Lake. “Valuation caps are all different, the discounts are different, and we see when we run the cap table that the founder has low ownership interest because the way the SAFEs work together has diluted them down so much.”

He advises modelling the scenarios out now to avoid later dilution surprises. “Always try to have a cap table model and enter the calculations in there.”

Yin advises founders to limit the number of SAFEs to a maximum of three tranches, such as a pre-seed, a seed, and a pre-A. The key to effectively managing multiple SAFEs is simplicity and understanding what you’re selling.

“If you do it on post-money SAFEs,” she says, “then you know exactly how much is converting, like $500,000 on X, $1 million on Y, $2 million on Z, and add it all up. That’s how much of the company you’ve sold.”

What is a convertible note?

Similar in many ways to a SAFE, a convertible note is a short-term debt instrument that is designed to convert into equity at a future financing event — most commonly, a priced equity round.

When a priced round is raised before the maturity date, the note automatically converts into equity (principal plus accrued interest) at the better of the cap price or the discounted price. The mechanics are nearly identical to a SAFE at the moment of conversion.

While convertible notes and SAFEs are both instruments in which an investor provides funds that can be later converted to equity, there are notable differences between the two.

SAFEs vs. convertible notes: What’s the difference?

Like a SAFE, a convertible note allows a startup to raise money before a formal valuation is set. But while a SAFE doesn’t need to be repaid and only converts to equity on a priced round, a convertible note operates more like a loan, with an interest rate and a maturity date by which the note must either be converted to equity or be repaid.

For pre-seed and seed stage companies, SAFEs are more common than convertible notes. “The early stages are so risky, there’s little appetite to lend money,” says Yin. Convertible notes may be more suited to companies at later stages, when investors might be concerned with preserving downside protection.

“The convertible note, perhaps, became more popular than the SAFE for companies past seed where there’s a bridge,” says Lake. “It offered a way to put money into a lot of companies, but with less focus on the ‘hockey stick,’ and more focus on not losing money. In the worst-case scenario, it’s not equity, it’s debt.”

SAFE vs. Convertible Note at-a-glance

What are the benefits of SAFEs for founders?

Simple agreements for future equity can be an integral instrument for startups looking to acquire capital, particularly in the critical early stages, and offer founders several advantages over other fundraising methods.

Speed and simplicity: Since they’re short and standardized, SAFEs have far less legal complexity than a priced round, and can be signed and funded in days, rather than weeks or months.

Low cost: Largely due to their simplicity, SAFEs come with much lower costs than traditional equity financings. Most significantly, the legal costs can be greatly reduced from a full priced round, which often requires the extensive involvement of lawyers and accountants.

No debt, no obligation: Because a SAFE isn’t a traditional loan, the founder can take advantage of increased capital without accruing interest or added balance-sheet liability.

Founder-friendly valuation deferral: SAFEs allow a company to raise funds now without having to negotiate its worth until a later stage, when (hopefully) it’s achieved greater stability and stronger financial metrics. This typically results in a higher valuation, which is better for the company’s longer-term viability.

What are the benefits of SAFEs for investors?

While SAFEs can be an invaluable fundraising tool for startups, they can also offer investors significant benefits.

Early access to high-growth startups: SAFEs allow investors to fund startups they believe to have high growth opportunities at the lowest possible valuation before these companies seek funding from institutional venture capital, making for a higher potential return on investment.

Favorable conversion terms: The valuation cap and discount methods offer conversion terms that reward investors for assuming early risk, ultimately giving investors more shares through a SAFE than they would during a Series A round.

Standardization: The Y Combinator post-money SAFE has become a familiarly recognized industry standard document, allowing for a smoother process and minimal friction in negotiations.

What are the risks of SAFEs for founders?

While a SAFE is, as its name evokes, a method with minimal risk for startup founders, there are some caveats they should note before entering into such an agreement.

Dilution uncertainty: If founders don’t fully grasp how multiple SAFEs stack before a priced round, they could be caught off-guard when SAFEs with different caps and discounts convert simultaneously at a priced round, resulting in more equity given away than anticipated.

No liquidation preference on converted SAFE shares: In post-money SAFEs, early investors rank below later preferred stockholders in a modest exit, which can create tension during acquisition negotiations and prompt later-stage investors to demand stronger protections as compensation.

No governance rights: SAFE holders typically have no board seats or voting rights until conversion, meaning founders (not investors) retain full control during the SAFE period, which might not align with investors’ expectations when funding these ventures.

Regulatory considerations: SAFEs are securities under U.S. and Canadian law, and therefore can be issued only to qualifying investors under an applicable exemption. Non-compliance with regulations can create legal issues during later-stage due diligence or in the exit stages.

What are the risks of SAFEs for investors?

Entering into a SAFE does present several possible hazards for investors that both they and founders should recognize.

No guaranteed return or repayment: The greatest risk SAFEs present for investors is illiquidity. Unlike a convertible note, a SAFE isn’t technically debt: no interest accrues and no maturity date forces a resolution. Therefore, if the company never experiences a triggering event that results in conversion, the investor’s money could sit indefinitely in limbo.

Valuation cap risk: Investors need to be aware of the valuation caps determined when negotiating a SAFE. If a company raises its priced round at a valuation below the SAFE’s cap, the cap provides no benefit: the investor converts at the same price as other investing parties, with no reward for their early risk.

Dilution from subsequent SAFEs: If a startup issues additional SAFEs — potentially at higher caps or with most favoured nation (MFN) clauses — this can reduce an investor’s percentage of their ownership before they’re issued the shares they’re expecting. (The MFN clause is a provision that automatically entitles a SAFE investor to the better terms of any subsequent SAFE issued by the company, ensuring they aren’t disadvantaged by investing earlier.)

Conversion timing: Pivotal decisions, such as when exactly a price round is initiated and shares are converted, remain entirely at the company’s discretion, presenting a degree of uncertainty for investors.

Limited recovery on dissolution: When a company winds down, SAFE holders are repaid after all creditors (but before other equity holders). Since most startup dissolutions are the result of company losses, this can mean SAFE investors lose their investment, with no recourse for recovery.

SAFEs: A simple, quick fundraising alternative

SAFEs offer early-stage founders the opportunity to raise necessary capital without the complexity that comes with raising venture capital through priced rounds. This founder-friendly investment vehicle is designed to be a simpler, quicker alternative to traditional equity financing, making it attractive to startups in the pre-seed and seed stages.

Since Y Combinator introduced the post-money SAFE in 2018, its adoption continues to grow in markets outside Silicon Valley (including Canada) as both founders and investors become more comfortable with its terms.

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