What a SAFE is

In Q2 2026, 93% of pre-seed rounds on Carta used SAFEs. Thus, the first money into your company will most probably come on a SAFE. But many founders sign a SAFE and cannot tell what the investor bought. This lesson answers one question: what does a SAFE investor get for the money?

A SAFE in one example

Maya is an angel investor. In March 2026, she sends $100,000 to Northwind Labs, the company of Ada and Ben. Maya and Northwind sign a SAFE. After the wire, Maya owns zero shares.

A SAFE is a short contract. The name is short for Simple Agreement for Future Equity. The investor pays money today. In return, the company promises shares at a subsequent time, when it sells shares at a fixed price in a priced round. That round is usually a seed round or a Series A.

Until that round, Maya holds a contract right, not shares. The YC form uses the words “the right to certain shares of the Company’s Capital Stock.” At the priced round, the SAFE converts into preferred shares automatically. Maya cannot select a different result.

Where the SAFE came from

Before 2013, most first checks used convertible notes. A convertible note is a loan that converts into shares at a subsequent round. It has an interest rate and a maturity date, the date when the loan is due.

Carolynn Levy, then a partner and lawyer at Y Combinator (YC), wrote a contract with fewer terms. YC announced it on 6 December 2013. Paul Graham wrote that it was “essentially convertible debt without the debt.” With no debt, “there is no need to fix a term or decide on an interest rate.”

YC changed the SAFE three times, and in 2026 it added a tool to send one:

Date	What changed
6 December 2013	YC releases the first SAFE. Its cap is a pre-money number.
28 September 2018	Version 1.0 of the post-money SAFE. The cap now includes all SAFE money. The pro rata right moves to a separate letter.
28 August 2021	Version 1.1. YC removes the post-money form with a cap and a discount.
February 2023	Version 1.2. Small changes to the liquidation preference and to the MFN.
2026	A free “Send a SAFE” tool for US companies. AI agents can use it through a command-line tool.

YC writes that its companies raised “over $15B+” on SAFEs. The change from a pre-money cap to a post-money cap is important. The lesson Pre-money and post-money SAFEs tells you why.

What a SAFE is not

Founders frequently confuse a SAFE with four other things. A SAFE is different from each of them:

• It is not a loan. A SAFE has no interest and no maturity date. The company does not have to repay it on a fixed date.
• It is not stock at this time. The holder cannot vote. The YC form tells you that the holder is not a stockholder “for any purpose other than tax purposes.”
• It is not safe for the investor. In 2017, the SEC wrote: “Despite its name, a SAFE may not be ‘simple’ or ‘safe.’” If the company shuts down, the investor gets money back only if cash is left after the creditors.
• It is not a valuation. The valuation cap, or the cap, is the highest price at which the SAFE converts. A $10M cap does not tell you that the company has a value of $10M today.

Numbers make the difference from a loan easy to see. Compare Maya’s SAFE with a convertible note of the same size at 6% simple interest, after 18 months:

Convertible note = $100,000 + ($100,000 × 6% × 1.5 years) = $109,000, due at maturity
SAFE             = $100,000, with no interest and no due date

The SAFE can stay open with no end date if no priced round and no sale occur. The note comes due. At maturity, the note holder can have a legal right to repayment.

Why does an investor accept no interest and no due date?

A first investor wants a part of a company that can become very large. Interest of a few percent each year is small next to that goal. The SAFE gives a different reward: the cap lets the investor buy shares at a lower price than subsequent investors. The standard form is also short, so the two sides negotiate few terms.

How a SAFE stops

A SAFE stays open until a priced round, a sale, or a shutdown occurs. Each one stops the SAFE in a different way:

• A priced round. The SAFE converts into preferred shares. If the cap applies, Maya’s $100,000 on a $10M post-money cap buys 1% of the company just before the round. The next three lessons teach this math.
• A sale or an IPO before a priced round. The YC form uses the term Liquidity Event. A capped SAFE gets the larger of two amounts: its money back, or its value as shares at the cap.
• A shutdown. The YC form uses the term Dissolution Event. The SAFE gets its money back only if cash is left after the company pays its creditors.

Many founders give an incorrect answer to the next question. Make a guess before you read on.

Predict first

Northwind sells for $5M before any priced round. Maya's $100K SAFE has a $10M post-money cap, and Northwind has no debt. How much does Maya get?

Type a guess before you continue. A guess first, even a wrong one, makes the answer easier to remember.

Your guessSave my guess

The widget shows each result. Select a different result, then move the numbers. Look for three facts:

• In a priced round, the cap helps Maya only when the Series A pre-money valuation is more than the cap.
• In a sale with no debt, the change from money back to shares occurs at a sale price equal to the cap.
• In a shutdown, the founders get nothing until Maya gets her money back.

Try it

What a SAFE turns into

Maya signs a post-money SAFE with Northwind Labs. Select what happens next and see what the SAFE gives Maya.

What happens next

RoundSaleShutdownNothing

Maya's SAFE

Post-money valuation cap

$10M

Series A pre-money valuation

$20M

The Series A sells 20% of the company.

Maya pays

$0.99

Series A pays $1.98

Maya gets

101,010

Preferred shares

Maya owns

0.8%

After the Series A

Series A value

$200K

2.00x the money paid

Ownership after the Series A

• Founders
• Maya
• Series A investors

The Series A pre-money valuation, $20M, is more than the $10M cap. The cap gives Maya a lower price, $0.99 a share against $1.98, so the SAFE converts at the cap into 101,010 preferred shares. Before the new money, that is 1% of the company, and the Series A dilutes it to 0.8%.

A worked example: a sale above the cap

The steps for a sale are the same for each capped SAFE. Here, a buyer pays $50M for Northwind before any priced round.

Worked example · step 1 of 4

Maya's SAFE in a $50M sale

1. 1

   Find the part that the SAFE owns at the cap

   A post-money SAFE owns its amount divided by its cap.

   $100,000 ÷ $10,000,000 = 1%

Show step 2Show all steps

Now do the same steps yourself.

Work it out

A $200K SAFE has a $10M post-money cap. Northwind sells for $40M before any priced round, with no debt. How much does the SAFE holder get?

Your answerCheck

Work it out

The same $200K SAFE, but Northwind sells for $6M. How much does the SAFE holder get?

Your answerCheck

The SAFE forms that YC supplies

YC writes the standard forms, and most US startups use them. In 2018, the post-money SAFE came in four forms:

• Valuation cap, no discount
• Discount, no valuation cap
• Valuation cap and discount
• MFN, no valuation cap and no discount

In 2021, YC removed the form with a cap and a discount. YC wrote: “We did not encounter situations where the combo safe was the preferred choice.” Thus, in 2026, YC supplies three US forms and an optional pro rata side letter. The discount has its own lesson, The cap and the discount. The MFN is in MFN SAFEs, side letters, and early exits.

Other countries

YC also supplies cap-only SAFE forms for Canada, the Cayman Islands, and Singapore. In the UK, founders use an advance subscription agreement (ASA) for investors who want SEIS or EIS tax relief. HMRC guidance, updated on 29 October 2026, does not let the investor get a refund “under any circumstances.” Thus, the money-back terms of a US SAFE do not agree with those reliefs. Speak to a UK lawyer before you sign one.

A tax question with no sure answer

QSBS (Section 1202 of the US tax code) can remove federal tax on the gain from startup stock. For stock acquired after 4 July 2025, 50% of the gain is free of federal tax after 3 years. After 4 years, 75% is free, and after 5 years, 100% is free.

For stock from a SAFE, nobody knows for sure when the holding period starts. The YC form tells you that the parties intend the SAFE to be stock for tax purposes. That statement does not bind the IRS. Carta’s SAFE guide (October 2026) writes that the holding period starts at conversion. A careful plan uses the conversion date. Speak to a tax professional before you act on this rule.

Quiz · question 1 of 5

Test what you learned

Which statement about a SAFE is correct?

• AThe company must repay it at maturity
• BIt gives the investor votes at once
• CIt has no interest and no maturity date, and it is not stock until it converts
• DIt adds interest until it converts