Introduction
The SAFE agreement is one of the central instruments for early-stage fundraising by startup companies. It was developed in 2013 by Y Combinator as a response to a clear need: enabling startups to raise capital quickly, by means of a relatively short and simple document, without being drawn into lengthy negotiations over valuation at a stage where it is nearly impossible to agree on the “correct” value. Instead of a full equity round or an interest-bearing loan, the investor provides money now and receives a commitment to obtain shares in the future when an investment occurs that establishes a defined share price.
Meaning of the SAFE Agreement
Although a short document, a SAFE agreement is a materially significant equity instrument. It is not a loan, carries no interest, and has no maturity date, and therefore does not fall within the usual category of debt. Legally, it is a contractual commitment to receive shares in the future, and this commitment will, in practice, determine the allocation of ownership in the company after the initial fundraising rounds. Thus, anyone who treats a SAFE as a “standard form” ignores the reality: this is a document capable of shaping the company’s capitalization structure for years ahead.
Typically, the agreement is built around two figures: the amount the investor provides and the valuation cap at which they enter. Sometimes there is also a discount on the share price, either instead of or in addition to the cap. In the future, when an equity round is conducted, the number of shares the investor receives will be calculated according to a formula based on that cap or that discount—whichever is more favorable to the investor. The economic meaning is simple: already on the date of signing the SAFE, one can estimate, at least approximately, what portion of the company has been sold to the investor, even if it does not yet appear in the cap table.
A key point arising from practice is the founders’ personal responsibility to understand at every stage what portion of the company they have sold. The fact that a SAFE is a commitment instrument rather than an issuance of recorded shares misleads many founders into thinking that “nothing has happened yet.” However, it is important to clarify that from a dilution perspective, once a SAFE is signed, the company is in effect committed to allocate a certain percentage of its future equity to the investor. For example, an investment of one million dollars at a post-money cap of six million dollars reflects the sale of approximately sixteen percent of the company. If several such investments are made, the percentages accumulate. When the company reaches a Series A round and discovers that the founders are left with only thirty percent, it is usually too late to unwind the situation, because the investor commitments have already dictated the outcome at the SAFE stage.
To simplify dilution understanding, Post-Money SAFE versions have been developed in recent years. In such a SAFE, the cap is defined such that, after the conversion of all SAFEs, the investor’s equity percentage derives clearly from the ratio between the investment amount and the valuation cap.
Advantages of the SAFE
The SAFE enables rapid fundraising with minimal bureaucracy, defers the valuation dispute to a stage where the company has real data, offers a convenient path for small investors or angels to enter, and significantly reduces advisory and negotiation costs relative to a full equity round. From an investor’s perspective, a SAFE with a cap and a discount on the future share price reflects a “reward” for early entry and provides relatively clear certainty about the conversion terms.
Risks and Disadvantages of Using the SAFE
On the other hand, the drawbacks are significant. Multiple SAFE agreements with differing terms and caps can make the cap table complex and at times intimidating for Series A investors. A founder who does not monitor the percentages sold may discover too late that substantial dilution has occurred. Certain investors may attempt to exploit the “simple” structure to insert mechanisms inconsistent with the original SAFE concept, such as broad liquidation preferences, aggressive MFN provisions, or unusual influence rights over the company. These can impair future fundraising and put the company in a problematic position before professional investors, who may be deterred from investing in companies with a complicated equity structure at such an early stage.
Another piece of advice: avoid trying to “break the market” at all costs by demanding excessive caps. Founders sometimes treat the valuation stated in a SAFE as a badge of honor, but in practice, the differences in final ownership percentages are far smaller than they imagine, whereas the time and energy spent on aggressive negotiation may delay the fundraising, harm relationships with investors, and distract from the primary goal—building a real company.
In addition, combining different instruments—such as SAFEs alongside convertible loans—may significantly complicate the calculations at the priced round and increase legal and financial advisory costs.
In an ideal situation, after a standard Series A round, the cap table will show the founders still holding a significant portion, sometimes around fifty percent, with the SAFE layer representing early investors at a relatively moderate level, alongside the Series A lead investor and an employee option pool. Reaching this result is not random; it requires thoughtful planning already at the drafting of the first SAFE.
Conclusion
Although a SAFE is a short document, each clause directly affects future equity allocation and the company’s ability to attract professional investors in subsequent rounds. Legal counsel before signing a SAFE helps founders understand the real implications of valuation caps and cumulative dilution, and helps investors understand the risks and rights they receive. Unlike a convertible note, which is a loan with interest and a maturity date, a SAFE is a pure equity commitment, and drafting errors are very difficult to correct retroactively. Proper advice ensures that the document serves the interests of both parties, reduces risks, and enables the company to continue growing without unnecessary legal and financial obstacles.
For further information please contact:
Hanan Efaim, Adv. Aviad bergrin, Adv.
Office: 03-691-6600 Office: 03-691-6600
Email: hanan@ekw.co.il E-mail: aviad@ekw.co.il