The Form of SAFE: A Founder's Section-by-Section Guide to the Valuation-Cap Instrument
The SAFE — Simple Agreement for Future Equity — is the security you actually issue when a pre-priced round investor wires money into your company. It is not a loan. It has no maturity date, no interest, and no repayment obligation. It is a promise that when you eventually price a round of preferred stock, that investor will convert their check into shares at a preferential price.
This guide walks the standard Y Combinator "Valuation Cap, no Discount" form section by section. Every clause below is drawn directly from the template you can download from your data room. Read this before you send a SAFE to an investor, before you sign one an investor sent you, and before you decide how much to cap the round at.
The instrument opens with a bold-face legend explaining that neither the SAFE nor the shares it will one day convert into have been registered under the Securities Act of 1933 or state blue-sky laws. The legend is not decorative. It is the disclosure that makes the private placement legal. Never delete it. Never modify it. It is boilerplate for a reason.
Directly under the legend the document names the issuing entity ("XYZ Corporation" in the template) and titles itself a "SAFE (Simple Agreement for Future Equity)." The company name here must match the Delaware certificate of incorporation exactly. A SAFE issued by "Acme, Inc." when the certificate says "Acme Corporation" is a defect a diligence lawyer will flag at Series A.
The first sentence — "THIS CERTIFIES THAT in exchange for the payment by [Investor] of $[amount]…" — creates the contract. Three variables fill in the blanks:
Investor. The exact legal name of the purchaser. Individual investors sign personally. Funds sign in the name of the fund entity (for example, "Acme Ventures Fund I, L.P."), not the management company.
Purchase Amount. The dollar figure the investor is wiring. This is the number that will divide into the conversion price at the next round.
Effective Date. The date the company countersigns. This is the date used for the two-year holding period under Rule 144 and for tax purposes.
Get all three right on the signature page. They flow through the rest of the document.
Section 1 is the operative section. It defines the four events that can trigger conversion or payment and it is the section every investor will actually read.
If the company closes a priced round of preferred stock ("Equity Financing") before the SAFE terminates, the SAFE converts automatically. The mechanic is a fork:
If the priced round's pre-money valuation is at or below the Valuation Cap, the investor receives Standard Preferred Stock — the same series the new investors are buying — at the round's price per share. In this case the SAFE holder is treated as if they invested in the new round.
If the priced round's pre-money valuation is above the Valuation Cap, the investor receives a shadow series called Safe Preferred Stock at the "Safe Price," calculated as the Valuation Cap divided by the fully-diluted capitalization. This is where the discount to the new investors comes from.
The section also requires the SAFE holder to sign the round's ancillary documents — voting agreement, investors' rights agreement, right of first refusal and co-sale — on the same terms as the new investors. This is what makes a SAFE holder a real shareholder at the moment of conversion, not a dangling promise.
If the company is acquired or IPOs before a priced round, the SAFE holder gets a choice. They can take a cash payment equal to their Purchase Amount — a full refund with no upside — or they can convert into Common Stock at the Liquidity Price and participate in the exit.
The section adds two important protections. First, if the company does not have enough cash at closing to pay all cash-electing SAFE holders, the available cash is distributed pro rata among them and the remainder converts to common. Second, in a tax-free reorganization the board can reduce the cash payment pro rata to preserve the tax treatment. Both are standard.
If the company winds down before any of the above happens, the SAFE holder is paid their Purchase Amount from whatever assets remain, in priority to common stockholders but behind any debt. In practice, this section is a legal formality — a dissolving startup rarely has enough cash to pay its SAFE holders — but it establishes the SAFE as senior to founder common.
The SAFE terminates automatically once one of the three events above has been consummated. There is no expiration date. A SAFE signed in 2018 and never converted is still outstanding today.
Section 2 does the heavy lifting. Every capitalized term in Section 1 traces back here. Read it slowly.
Valuation Cap. The dollar figure you and the investor negotiated. This is the maximum pre-money valuation at which the SAFE will convert. Lower cap means more dilution for you and more shares for the investor.
Equity Financing. A bona fide transaction with the principal purpose of raising capital, in which the company issues preferred stock at a fixed pre-money valuation. Convertible note financings and other SAFEs do not count. This is why a "SAFE round" does not trigger conversion.
Liquidity Event. A change of control or IPO. "Change of Control" is defined broadly to include a sale of a majority of voting power, a merger where the company's holders no longer control the surviving entity, or a sale of substantially all assets.
Dissolution Event. A voluntary termination, general assignment for the benefit of creditors, or any other liquidation, dissolution, or winding-up.
Standard Preferred Stock and Safe Preferred Stock. The two shadow series described above. Safe Preferred has the same rights as Standard Preferred except its liquidation preference and conversion price are based on the Safe Price rather than the round price.
Company Capitalization. The fully diluted count used to calculate the Safe Price. This includes all outstanding shares, options, warrants, and the unissued option pool — but excludes the SAFEs and convertible securities themselves. Read this definition carefully; it determines exactly how many shares the SAFE holder gets.
The company represents that it is duly organized, has full corporate power to issue the SAFE, has taken all necessary corporate action, and that issuing the SAFE does not violate its charter, bylaws, or any material agreement. Standard. If any of these are not true you have a bigger problem than the SAFE.
The investor represents they are an accredited investor, are buying for their own account and not for resale, understand the securities are restricted, and can bear the economic risk. This is the private-placement compliance that pairs with the legend on page one.
The last section covers the housekeeping: choice of law (Delaware in the template), notice provisions, that the SAFE cannot be assigned without the company's consent, and that the SAFE and the certificate of incorporation together constitute the entire agreement.
The most important sub-clause is the transfer restriction. The investor cannot sell or transfer the SAFE without the company's written consent (with a narrow exception for affiliates). This is what stops SAFEs from being traded on secondary markets and what preserves your ability to know who is on your cap table.
Three mistakes recur. First, founders treat the Valuation Cap as if it were the valuation. It is not. It is the ceiling. The actual conversion price will almost always be lower, and the dilution larger than the founder modeled.
Second, founders sign multiple SAFEs at different caps and stop tracking them. When the priced round comes, the cap table math is a nightmare. Keep a live SAFE schedule from day one, ideally in the same spreadsheet as your cap table.
Third, founders assume the "post-money" YC SAFE and the "pre-money" YC SAFE behave the same way. They do not. This template — the classic pre-money form — dilutes the founders and the new-round investors together. The post-money form dilutes only the founders. If you have both outstanding, model the conversion carefully.
The SAFE is the shortest venture instrument you will ever sign and among the most consequential. Its brevity is deceptive. Every capitalized term in Section 1 pulls weight through Section 2. Read the whole document — not just the cap and the amount — and keep a running schedule of every SAFE you issue. The cleanest Series A closings are the ones where the founder can hand the lead investor a spreadsheet that ties every outstanding SAFE to the exact number of shares it will convert into. The messiest are the ones where the founder cannot.
