SAFE (Simple Agreement for Future Equity)
The Simple Agreement for Future Equity (SAFE) is a convertible financing instrument created by Y Combinator in 2013, allowing an investor to contribute funds in exchange for future shares issued at a qualified financing round, with no interest and no maturity date.
Definition
The Simple Agreement for Future Equity, published by Y Combinator in December 2013 and revised in September 2018 (the post-money SAFE), is a contract under which an investor pays an amount to a startup in exchange for the right to receive shares at a future qualified financing round (an Equity Financing), at a sale (a Liquidity Event) or at dissolution. Unlike a convertible note, the SAFE bears no interest and has no maturity date. Conversion typically operates with a valuation cap and/or a discount on the price of the next round. The post-money form introduced in 2018 sets the dilution of SAFE investors in a transparent way before the Series A round.
In plain English
The SAFE is the fastest way to finance a U.S. startup at the pre-seed and seed stages. You sign a 5-page document, the investor wires the money and you defer the valuation negotiation to the next round. No interest to pay, no repayment to worry about, no immediate dilution to record on the cap table before the qualified round. The post-money SAFE makes clear that the dilution from SAFEs is borne entirely by the founders (and not by the future Series A investors), which reassures the latter and complicates the trade-off for the founder. A 10 million dollar valuation cap with a 20 percent discount is a standard Y Combinator structure. Caveat: the SAFE is not natively recognized in France, and an investor who is a French tax resident may be surprised at conversion by the asymmetric tax treatment.
RWM transatlantic case study
For a Delaware C-Corp raising from U.S. and French business angels, we systematically use the standard Y Combinator post-money SAFE for U.S. checks, and we adapt a BSA-AIR (Bon de Souscription d'Actions, Accord d'Investissement Rapide) for French checks where the French entity remains the issuer. The Delaware SAFE is governed by Delaware law (the Delaware General Corporation Law, Title 8), and conversion follows the MFN (Most Favored Nation) provisions where several SAFEs are signed on different terms. On tax, the SAFE is not a capital instrument until it converts, which creates ambiguity for QSBS treatment (Qualified Small Business Stock, section 1202 IRC): recent case law and IRS rulings tend to start the 5-year holding period at the conversion into Common Stock, not at the initial payment. We document this mechanic at the time of the raise to avoid a bad surprise at exit.
Points to watch
- SAFE pre-money (2013) versus post-money (2018): default to post-money.
- No interest, no maturity, but real dilution at conversion.
- MFN clause required where several SAFEs are signed in parallel on different terms.
- QSBS section 1202: the 5-year period is often counted from conversion, not from payment.
- For a French investor, friction on the tax side is possible: prepare a dedicated memo.