How to Choose the Right SAFE Financing Agreement

In early-stage startup financing, SAFE (Simple Agreement for Future Equity) has become one of the most widely used investment instruments. However, different types of SAFE structures vary significantly in their pricing mechanisms and investor protections, which can also affect founder dilution and future financing outcomes. This article uses a simple example to explain three common SAFE structures and their key differences, helping founders and investors better understand their practical implications.

If you are considering using a SAFE for early-stage fundraising, or would like to evaluate how different SAFE terms may affect your company’s capitalization structure and future financing, please feel free to contact Roy Wang, Esq. at roy.wang@consultils.com.

What Is a SAFE?

If you are preparing for early-stage fundraising, you may have already encountered the term SAFE. SAFE stands for Simple Agreement for Future Equity, a financing instrument introduced in 2013 by the startup accelerator Y Combinator. It has since become one of the most widely used tools for early-stage startup financing worldwide. 

In simple terms, a SAFE allows investors to provide funding to a company today in exchange for the right to receive equity in the future. The investment does not immediately convert into shares. Instead, the investment converts into equity when the company completes a future priced financing round, such as a seed round. 

Unlike convertible notes, SAFE agreements do not accrue interest and do not have a maturity date. As a result, they do not create repayment pressure for startups. For early-stage companies, SAFE financing offers a flexible and efficient way to raise capital. 

Another advantage of SAFE agreements is their simplicity. Compared with traditional equity financings, SAFE investments require fewer negotiated documents and fewer complex terms. Once the core terms are agreed upon, the parties can sign the agreement and complete the investment quickly. Investors may also participate on a rolling basis rather than waiting for all investors to close simultaneously.

The Three Main Types of SAFE Agreements

Today, the most commonly used version is the Post-Money SAFE template updated by Y Combinator in 2018. YC provides several standard SAFE templates, which mainly differ in the type of price protection offered to early investors. 

To illustrate the differences, consider the following example scenario:

• An early investor invests $500,000 through a SAFE agreement.

• At the time of signing, the company has 10 million shares, all held by the founders.

• One year later, the company raises a seed round at $2 per share.

We can then compare how different SAFE structures affect the investor’s conversion outcome.

Type 1: Valuation Cap SAFE (No Discount)

The valuation cap SAFE is currently the most widely used structure.

Under this structure, the company and the investor agree on a valuation cap, which sets the maximum company valuation used to calculate the investor’s conversion price in the future financing round. If the company’s valuation later increases, the investor still converts based on the lower capped valuation. This mechanism rewards early investors for taking early-stage risk. 

The conversion price is calculated as: Valuation Cap ÷ Total Company Shares

In the example above:

• Valuation cap: $5 million

• Total shares: 10 million

The conversion price becomes $0.50 per share.With a $500,000 investment, the investor receives: $500,000 ÷ $0.50 = 1,000,000 shares

For founders, the valuation cap directly affects dilution. A lower valuation cap results in a lower conversion price and greater dilution of founder ownership. For example, if the cap were reduced from $5 million to $2.5 million, the conversion price would drop to $0.25 per share, allowing the same $500,000 investment to convert into 2 million shares instead of 1 million. 

Because of this impact, founders should carefully plan the valuation cap in relation to their target fundraising amount rather than committing to an excessively low cap during early negotiations.

Type 2: Discount SAFE (No Valuation Cap)

A discount SAFE does not set a valuation cap. Instead, it allows the early investor to convert at a discount to the price paid by new investors in the future financing round. The discount typically ranges from 10% to 20%. 

Using the same example:

• Seed investors pay $2 per share.

• The SAFE investor receives a 20% discount.

The conversion price becomes: $2 × (1 − 20%) = $1.60 per share

The investor’s $500,000 investment converts into: $500,000 ÷ $1.60 ≈ 312,500 shares

This gives the investor about 62,500 more shares than if they converted at the seed round price without a discount. 

A key characteristic of discount SAFEs is that the exact number of shares cannot be calculated when the agreement is signed. The outcome depends on the valuation of the future financing round. If the company raises capital at a very high valuation, the discount may provide significant value. If the valuation is relatively low, the benefit of the discount will be smaller. 

For founders, this means the final dilution cannot be predicted precisely until the future financing round occurs.

Comparison of the Two Structures

Returning to the same example:

• Valuation cap SAFE ($5M cap) → Investor receives 1,000,000 shares

• Discount SAFE (20% discount) → Investor receives approximately 312,500 shares

At first glance, the valuation cap SAFE appears more favorable for the investor. However, this result depends on the assumption that the company’s future valuation is significantly higher than the cap.

If the company’s valuation at the conversion round is close to the valuation cap, the discount SAFE could potentially result in a more favorable outcome for the investor. 

Type 3: MFN Clause

The third structure involves an MFN (Most Favored Nation) provision. Unlike valuation caps or discounts, MFN is not a pricing mechanism itself. Instead, it is an additional contractual protection that can be attached to different types of SAFE agreements. 

The MFN clause allows an early investor to adopt more favorable terms if the company later issues a SAFE with better economic terms to another investor.

For example:

• Investor A holds a SAFE without a valuation cap but with an MFN clause.

• Three months later, the company issues a new SAFE to Investor B with a $5 million valuation cap.

Under the MFN provision, Investor A may elect to update their SAFE to include the same valuation cap terms. 

MFN provisions are particularly useful in very early fundraising stages, when the company may not yet have a clear valuation but wants to quickly raise small amounts of capital from early supporters such as friends, advisors, or angel investors.

Typically, the MFN right can only be exercised once, and once the investor adopts the new terms, the MFN protection terminates. In most cases, the clause applies only to the core economic terms of the SAFE agreement.  

Practical Considerations When Choosing a SAFE

In practice, valuation cap SAFEs are the most commonly used structure because they provide clearer transparency for both founders and investors. Discount SAFEs may be more appropriate in very early stages when assigning a valuation is difficult, but they introduce greater uncertainty regarding future dilution. 

• Plan the fundraising size carefully

When using valuation cap SAFEs, the relationship between the valuation cap and the total amount raised is critical. Founders should determine a reasonable fundraising target and use that target to guide the valuation cap. If the company raises significantly more capital than anticipated relative to the cap, founder ownership may be diluted more than expected. 

• Understand dilution risks in discount SAFEs

Although discount SAFEs do not involve a fixed valuation cap, dilution can still be difficult to predict in advance. The final ownership percentages will only become clear once the future financing round is priced and completed. Founders should therefore have a realistic expectation of future valuation levels when using discount-based structures. 

• Use a consistent SAFE structure within the same financing round

Using multiple SAFE structures within the same fundraising round can significantly complicate equity conversion calculations. In practice, companies are generally advised to use the same SAFE template for all investors in the same round to maintain a clear and transparent capitalization structure. 

If you are considering using a SAFE for early-stage fundraising, or would like to evaluate how different SAFE terms may affect your company’s capitalization structure and future financing, please feel free to contact Roy Wang, Esq. at roy.wang@consultils.com.

Disclaimer: The materials provided on this website are for general informational purposes only and do not, and are not intended to, constitute legal advice. You should not act or refrain from acting based on any information provided here. Please consult with your own legal counsel regarding your specific situation and legal questions.

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As Partner and Head of M&A at ILS, David advises technology companies on venture financings, M&A, and cross-border transactions—bringing top-tier legal expertise and deep technical insight. He has closed $3B+ across 100+ deals, supporting clients from early-stage startups to global enterprises across the full corporate lifecycle, with a dealmaking style that combines strategic judgment and crisp execution.

Previously, David was Head of Legal at Humane, Inc., an AI unicorn acquired by HP, and practiced at Wilson Sonsini, Latham & Watkins, Cooley, and Gibson Dunn. He is known as both legal counsel and strategic business partner on complex, high-stakes transactions across AI, clean energy, biotech, and software.

Email: david.liu@consultils.com | Phone: 626-344-8949

Roy specializes in corporate, compliance, regulatory, and financing matters, with extensive experience in executing complex transactions and navigating sophisticated regulatory frameworks to support business strategy.

He began his career at a Magic Circle firm and has over five years of experience across derivatives and structured finance, financial regulation, and international commercial arbitration, advising clients on cross-border financing and regulatory compliance.

With a strong global practice background, Roy provides strategic, practical guidance on complex legal matters with both local and international implications.

Email: roy.wang@consultils.com | Phone: 626-344-8949