When a startup raises its first money, the founder faces two questions: what is the company worth today, and what does the investor get in return? At the earliest stage the first has no honest answer - there is little revenue and the product is still taking shape. The SAFE was made for exactly this: the investor pays now, and the company's price is set later, in a real priced round.
This article explains what a SAFE is, how the ownership is worked out, what happens at the next round, how it compares with a convertible note and a priced round, and what a startup in Uzbekistan needs to know - with worked examples.
What a SAFE is
SAFE stands for Simple Agreement for Future Equity. It is a contract of a few pages: the investor wires money to the company, and the company promises them shares in the future - usually at its next priced round.
On the day a SAFE is signed the investor does not become a shareholder. They get a right to shares, which is triggered by an event: the company raising a priced round, being sold, or shutting down.
What defines a SAFE:
- It is not debt. No interest and no maturity date. The company does not have to pay the money back.
- No price today. The company is not valued; usually only a valuation cap is agreed.
- A standard document. The form is open and the same for everyone, so nothing has to be negotiated from scratch.
- Fast and cheap. Signed in days, with little in legal fees.
Where the SAFE came from
Y Combinator created the SAFE in 2013. Before that, early-stage startups mostly raised on convertible notes. A note is debt, so it carries interest and a maturity date: if the company had not raised a round by then, founders and investors had to renegotiate. The SAFE kept the useful part of the note - converting into shares later - and dropped the rest.
In 2018 Y Combinator released the post-money SAFE, and that version is the standard today. The difference is simple but important: with a post-money SAFE, how much of the company each investor owns is known on the day they sign. The SAFE is now the most widely used early-stage financing document in the world.
How a SAFE works: three steps
- Money now. The founder and the investor agree on the amount and the terms (usually a valuation cap), sign the SAFE, and the money goes to the company.
- The wait. The company spends the money and grows. Meanwhile the SAFE holder is not a shareholder: no vote, no dividend, no board seat.
- Conversion. When the company raises a priced round (a fund invests at a set valuation, say), the SAFE converts into shares automatically. The holder gets the same class of shares as the new investors, at a lower price - the reward for taking the risk first.
How the ownership is worked out: the post-money cap
A post-money SAFE has one formula:
Investor's ownership = investment ÷ post-money valuation cap
For example, an investor who puts in $500,000 on a $5M post-money cap owns 10% of the company. It works the other way too: to raise $1,000,000 for 15%, the cap is about $6.67M.
"Post-money" means the cap is measured after the SAFE money is in. That is why the stake is exact: however many more SAFEs the company issues, this investor's ownership does not change before the next priced round. Additional SAFEs dilute only the founders.
Several SAFEs can sit on different caps - each one's stake is worked out on its own, and they add up:
| Investor | Investment | Post-money cap | Ownership |
|---|---|---|---|
| Angel investor A | $50,000 | $2.5M | 2% |
| Angel investor B | $100,000 | $4M | 2.5% |
| Fund | $300,000 | $6M | 5% |
| Total | $450,000 | 9.5% |
In this example the founders own 90.5% of the company until the priced round. Update a table like this before every new SAFE: many founders only learn what their individually small SAFEs added up to when the round arrives.
What happens at the next round
Say a year later a fund invests $2M at an $8M pre-money valuation. The post-money valuation is $10M and the new investor owns 20%. The SAFE holders and the founders are all diluted by that 20% - each stake is multiplied by 0.8:
| Before the round | After the round | |
|---|---|---|
| Founders | 90.5% | 72.4% |
| SAFE holders | 9.5% | 7.6% |
| New investor | - | 20% |
| Total | 100% | 100% |
For simplicity the example leaves out the employee option pool. In practice investors in a priced round often ask for the pool to be enlarged, and that comes out of the founders' stake too.
Note that every SAFE's cap ($2.5-6M) is below the round's valuation ($8M). That is why the SAFE holders get their shares cheaper than the new investor - it is what the cap is for.
Valuation cap and discount
A SAFE can set the lower price in two ways.
Valuation cap - the highest valuation at which the SAFE converts. However high the round prices, the holder converts at the price the cap gives.
Discount - a percentage off the next round's price, usually 10-25%. With a 20% discount, if a share costs $1.00 in the round, the SAFE holder pays $0.80.
Some agreements have both - then the investor gets whichever gives the lower price. For a SAFE with a $5M cap and a 20% discount:
| Next round's valuation | By the cap | By the discount | Applies |
|---|---|---|---|
| $10M | $5M | $8M | the cap |
| $5.5M | $5M | $4.4M | the discount |
The faster the company grows, the more the cap matters; when the round prices close to the cap, the discount does the work.
The kinds of SAFE
Y Combinator publishes three post-money SAFE forms:
- Valuation Cap, no Discount - the most common.
- Discount, no Valuation Cap - the price is the next round's, less the discount.
- MFN (Most Favored Nation), no cap and no discount - the investor may take the best terms of any SAFE issued later. Usually for very early, small cheques.
Alongside them there is a pro rata side letter: it gives the investor the right to invest again in the next round to keep their stake. That right is agreed separately, not in the SAFE itself.
SAFE vs convertible note vs priced round
| SAFE | Convertible note | Priced round | |
|---|---|---|---|
| Document | Standard, a few pages | A loan agreement | A full set of documents |
| Legal cost | Low | Medium | High |
| Speed | Days | Weeks | Weeks to months |
| Debt? | No | Yes - interest and a maturity date | No |
| Valuation | Deferred | Deferred | Set now |
| Investor rights | Usually none | A creditor's rights | A shareholder's rights, often a board seat |
In short, the SAFE is for the early stage: the company is hard to value, speed matters, and there is no time for a long negotiation with each investor. A priced round comes once the company has grown and there is something to value it on - revenue, a growth rate.
For the founder: the upside and the risks
The upside:
- The money comes fast: no waiting for a round to "close", and each investor can sign separately.
- No long argument about valuation - valuing a company at the earliest stage is close to impossible.
- It is not debt: no maturity, no interest, no demand to repay.
- You keep control: a SAFE holder has no vote and no board seat.
The risks:
- Dilution you cannot see. Small SAFEs add up to a large stake, and you often find out at the priced round.
- A low cap is expensive. Agree a low cap in a hurry and that investor ends up with a very large stake once the company grows.
- What if there is no round? If the company becomes profitable without raising a priced round, a SAFE may stay unconverted for a long time - which strains the relationship with the investor.
For the investor
Through a SAFE an investor gets into an early company quickly and cheaply, and for taking the risk first they pay less than later investors. In return they wait: no dividend, no vote, and if the company fails the money may not come back. That is why investors negotiate the cap carefully and often ask for a pro rata side letter.
If the company is sold or shuts down
- Sold before a priced round: the SAFE holder gets the greater of their money back or what converting at the cap would pay from the sale.
- Shut down: what is left goes to creditors first, then to SAFE holders, and only then to common shareholders, the founders included.
Common mistakes
- Not keeping a cap table. After every SAFE, work out who owns what. A simple spreadsheet is enough; the valuation calculator helps too.
- Picking the cap by feel. Decide first how much you need and how much of the company you will sell; the cap follows: investment ÷ ownership = cap.
- Changing the terms for every investor. The further you stray from the standard form, the more questions the next round will ask.
- Forgetting the side letters. Pro rata, information and other rights come in separate letters - keep a list of those too.
- Treating a SAFE as free money. It is a piece of the company; only its price is set later.
SAFEs in Uzbekistan: what to know
The SAFE was written for US law - specifically for Delaware corporations: it speaks of shares, preferred stock and a board of directors. Most startups in Uzbekistan, though, are formed as limited liability companies (MChJ). An MChJ has no shares, only participation interests in its charter capital, and admitting a new participant takes a participants' resolution and a change to the charter capital. So signing a US-form SAFE unchanged in the name of an Uzbek company can have an uncertain legal outcome.
In practice startups usually take one of three routes:
- An overseas holding company. A parent company is formed in Delaware, the Cayman Islands, Singapore or the UK, the Uzbek MChJ becomes its subsidiary, and money is raised at the holding level on SAFEs. International funds often expect exactly this structure. Y Combinator also publishes SAFE forms for companies formed in Canada, the Cayman Islands and Singapore.
- A local document. If the company stays only in Uzbekistan, a lawyer turns the idea of the SAFE into a document adapted to local law - for example, a loan that converts into a participation interest, or an agreement to grant one in the future.
- Equity straight away. The investor receives a stake now; that means valuing the company now.
Whichever route you take, find out in advance what the rules are on money coming in from abroad, on tax and on currency, and talk to a lawyer licensed in Uzbekistan before you sign anything.
Quick questions
Is a SAFE debt? No. There is no interest and no maturity date - it is a right to future shares.
When does a SAFE convert? Automatically, when the company raises a priced equity round.
How do I know how much I am selling? With a post-money SAFE: investment ÷ cap. With several SAFEs, the stakes add up.
Can a SAFE have no cap? Yes - the MFN form, or the discount-only form.
What if the same investor puts in more? Usually a new SAFE is signed; the existing one is left as it is.
Where are the official forms? On Y Combinator's site: ycombinator.com/documents.
In short
For an early-stage startup the SAFE is the simplest and fastest way to raise: the money comes now, and the valuation is set once the company has grown into something that can be valued. Its strength is its simplicity - and so is its risk: every SAFE is a piece of the company. Do the arithmetic before every signature, keep a cap table, and fit the document to the law of the country where your company is formed.
For the other ways to raise money, see our article "How to raise investment for a startup in Uzbekistan".
This article is information, not legal, tax or accounting advice. Before signing anything, talk to a lawyer licensed in the country where your company is formed.