SAFE (Simple Agreement for Future Equity)

A SAFE converts into equity at the next priced round, usually the Series A, based on two terms negotiated up front: Valuation cap: the maximum valuation at which the SAFE converts, protecting early investors from being diluted at a much higher price later. Discount rate: a percentage off the priced round's valuation, typically 10-20%, giving the SAFE holder a better price than new investors. Example: An angel invests $200,000 on a SAFE with a $5 million cap. A year later the company raises a Series A priced at a $10 million valuation. Instead of converting at $10 million, the SAFE converts at the $5 million cap, so the angel ends up owning roughly twice the equity a new investor at the priced round would get for the same check. Why founders use SAFEs: speed and simplicity. A SAFE is a one to two page document with no valuation negotiation and no board seat, and can close in days. Priced equity rounds require agreeing on a valuation and drafting a full stock purchase agreement, which takes weeks of legal work. Watch for SAFE stacking: raising multiple SAFEs at different caps before a priced round can create more dilution than founders expect, since every SAFE converts at once. Track the fully diluted cap table as you stack SAFEs, not just the cash raised.

A pre-seed startup raises $500,000 across three SAFEs at caps of $4M, $5M, and $6M. When the Series A prices at $12M, all three convert at their respective caps, meaning the founders have given up more equity than a single $500k SAFE at one cap would have cost.