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Funding guideSAFE = Simple Agreement for Future Equity. Created by Y Combinator. Now the dominant instrument for pre-seed and seed rounds. Looks simple, but the dilution math gets complicated fast.
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Safe Notes Explained · File.Business

SAFE notes explained. How they work and the math founders must run.

A SAFE note is not equity yet. It is the promise of future equity at the next priced round, at a valuation determined by the terms (cap, discount, or both). Founders often underestimate how much dilution multiple SAFEs cause by Series A conversion time. This guide explains the math, the pre-money vs post-money distinction (which changed everything in 2018), and when to use SAFEs vs priced rounds vs convertible notes.

Key facts

Start here.

Key fact
Defined

SAFE = Simple Agreement for Future Equity. Investor pays now, receives equity at next priced round.

Key fact
No interest, no maturity

Unlike convertible notes, SAFEs do not accrue interest and have no repayment date. They convert only when triggered.

Key fact
Valuation cap and/or discount

SAFE converts at the lower of: (a) the cap valuation, or (b) the next round valuation × discount rate. Either or both can be specified.

Key fact
Pre-money vs post-money

Pre-money SAFEs (original 2013 version) and post-money SAFEs (introduced 2018) calculate dilution differently. Post-money is now standard.

Key fact
Conversion trigger

Most common: next priced equity round. Also: change of control, dissolution, IPO.

In depth

The full picture.

01

What a SAFE is

A SAFE is a contract: investor sends money now, in exchange for the right to receive equity at the next priced round. The amount of equity depends on the SAFE terms (cap, discount) and the price of that next round. Until conversion, the investor has no shares and no equity rights.

02

Valuation cap

A cap is the maximum valuation at which the SAFE converts. Example: $5M cap. If next round is at $20M valuation, SAFE converts at $5M (much better for investor). If next round is at $3M, SAFE converts at $3M (same as new investors get).

03

Discount

A discount is a percentage off the next-round price. Example: 20% discount. If next round is at $20M, SAFE converts as if valuation were $16M (20% off).

04

Both (cap + discount)

When both are specified, the SAFE converts at whichever gives the investor MORE equity (lower effective price). This is the most common structure.

05

Pre-money SAFE (original)

Convert as if SAFE money is part of pre-money valuation. Multiple SAFEs interact in unpredictable ways with the next round. Confusing dilution math.

06

Post-money SAFE (current standard)

Convert as if SAFE money is part of post-money valuation. Each SAFE's percentage is fixed regardless of other SAFEs. Predictable dilution. Now the default.

07

MFN (Most Favored Nation)

If you sell a SAFE on one set of terms, then a later SAFE on better terms, MFN clause forces earlier SAFE up to the better terms. Common protection clause.

08

Pro-rata rights

Right for SAFE investor to invest in the next priced round to maintain their percentage ownership. Sometimes included; sometimes negotiated.

09

When to use SAFE

Pre-seed and seed rounds. Speed and simplicity over precise valuation. When you cannot or do not want to set a formal valuation yet.

10

When NOT to use SAFE

Series A and beyond (use priced equity). When investors are not familiar with SAFEs (use convertible notes or priced). When you need debt structure for tax or other reasons.

Worked example

Worked example: $500k SAFE with $5M post-money cap

Founder owns 100%, 10M sharesFounder: 100%
Investor signs $500k SAFE at $5M post-money capSAFE represents 10% future equity ($500k / $5M)
Series A: $2M raised at $10M pre / $12M postSeries A investor gets 16.7% ($2M / $12M)
SAFE converts at $5M cap (better for investor than $10M new-round price)SAFE investor gets 10%
Option pool 15% added pre-money (founder dilution)Founder: 100% × (1 - 0.10) × (1 - 0.15) × (1 - 0.167) ≈ 64%
Final cap tableFounder ~64%, SAFE investor 10%, Series A investor ~17%, option pool ~15%, rounding
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FAQ

Common questions.

What does SAFE stand for?
Simple Agreement for Future Equity. Created by Y Combinator in 2013, updated to post-money version in 2018.
Is a SAFE debt or equity?
Neither at signing. It is a contract right to future equity. Not debt (no interest, no maturity), not equity (no shares issued until conversion).
What is a valuation cap?
The maximum valuation at which a SAFE converts. Lower cap = more equity to the SAFE investor at conversion.
Pre-money vs post-money SAFE: which is better for founders?
Post-money SAFEs give clearer dilution math but typically more dilution to founders than equivalent pre-money SAFEs at the same cap. Pre-money SAFEs are no longer the default.
Should I use a SAFE for friends and family?
SAFE works but may be unfamiliar to non-startup investors. Some founders use simple convertible notes or direct equity for friends/family.
Can a SAFE expire?
Standard SAFEs do not expire. They sit until a conversion event (next priced round, change of control, dissolution). Some custom SAFEs include expiration; not standard.
What happens if there is no next round?
The SAFE sits indefinitely. If the company dissolves, SAFE holders typically receive their money back from remaining assets (after debts). If company is acquired without a priced round, SAFE converts at the cap.
Are SAFEs taxable to the investor?
At signing: typically not. At conversion to equity: typically not (treated like a normal stock purchase). Special situations may differ; consult a tax advisor.
How much can I raise with SAFEs before needing a priced round?
Practically, $1-3M cap total in SAFE notes before institutional investors push for a priced Series A. Beyond that, dilution math gets too messy and structure becomes unwieldy.

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This guide is educational. Funding decisions require professional advice from licensed attorneys and CPAs.

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