A Simple Agreement for Future Equity (SAFE) is a popular fundraising tool used by early-stage startups to raise capital quickly and with less friction than a traditional equity round. While SAFEs are often described as “simple”, they still carry important commercial and legal consequences that founders should understand before using them.
This article explains how SAFEs work in practice, how they are commonly structured, and the key issues founders should consider when negotiating a SAFE with venture capital investors.
What Is a SAFE?
A SAFE is a contractual right to receive shares in a company at a later date, usually when the company completes its next priced equity round. When an investor signs a SAFE, they invest capital immediately but do not receive shares at that time.
Unlike a share subscription, a SAFE does not set a fixed valuation upfront. Unlike a loan, it does not accrue interest and does not need to be repaid. Instead, the SAFE converts into equity in the future, based on terms agreed upfront.
This structure makes SAFEs particularly attractive for early-stage companies that are still refining their product, traction, or market position and are not yet ready to agree on a valuation.
Why Startups and Investors Use SAFEs
From a founder’s perspective, SAFEs offer speed and flexibility. They are typically faster and cheaper to implement than a full equity round and allow founders to defer valuation discussions until the business has matured further.
From an investor’s perspective, SAFEs provide exposure to future upside. Investors are rewarded for early risk by receiving shares at a favourable price when the SAFE converts, usually through a discount, a valuation cap, or both.
Importantly, a SAFE allows investors to back a company early without immediately stepping into the role of shareholders.
How SAFE Conversion Works
A SAFE converts into shares when a defined trigger event occurs, most commonly the next priced equity funding round.
At that point, the SAFE investor receives shares based on whichever conversion mechanism gives them the better outcome. This is typically either:
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a discounted price compared to new investors in the round; or
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a price calculated using a pre-agreed valuation cap.
This mechanism is designed to reward early investors for taking on higher risk before the company’s value is fully established.
Structuring a SAFE Round Sensibly
One of the most common mistakes founders make is issuing multiple SAFEs over time on different commercial terms. While raising capital incrementally can feel pragmatic, inconsistent SAFE terms can create complexity, uncertainty, and unattractive cap tables for future investors.
As a general rule, founders should aim to:
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limit the number of SAFE rounds;
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keep commercial terms consistent across SAFE investors; and
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ensure that the SAFE structure is easy to understand and convert.
A clean and predictable SAFE structure makes future priced rounds easier and reduces friction during due diligence.
Key Commercial Terms Founders Should Focus On
Two of the most important variables in a SAFE are the discount rate and the valuation cap.
The discount rate gives SAFE investors a reduced share price when the SAFE converts, reflecting their early risk. The valuation cap sets a maximum company value at which the SAFE can convert, providing certainty to investors if the company’s valuation increases rapidly.
Founders should consider these terms in light of timing. If a priced round is expected soon, overly generous discounts or low valuation caps can result in disproportionate dilution over a short period. The objective is to fairly reward early investors without undermining future fundraising or founder equity.
Another important structural choice is whether the SAFE is calculated on a pre-money or post-money basis. This choice directly affects how dilution is allocated between founders and investors once the SAFE converts, and it should be carefully modelled before finalising terms.
Conversion Thresholds and Trigger Events
Some SAFEs specify a minimum size for the next funding round before conversion is triggered. This allows founders to issue small amounts of equity or bring in strategic participants without automatically converting all SAFEs.
These thresholds can provide flexibility, but they must be clearly defined to avoid uncertainty or disputes later.
SAFEs Are Not Debt
A key feature of SAFEs is that they are not loans. They do not accrue interest, do not have repayment obligations, and usually do not have a maturity date.
This makes them less burdensome for early-stage companies, but it also means investors are relying entirely on future equity conversion for their return.
Rights of SAFE Investors
Until conversion, SAFE holders are not shareholders. They generally do not have voting rights, board representation, or the ability to attend shareholder meetings.
However, in larger SAFE rounds, some investors may request additional protections. These are not automatic and must be agreed separately, often through side letters or ancillary agreements. Founders should be cautious when granting such rights, as they can materially alter governance dynamics before investors formally become shareholders.
Practical Takeaways for Founders
SAFEs can be an effective fundraising tool when used thoughtfully, but they should not be treated casually.
Founders should:
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understand how conversion mechanics affect dilution;
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avoid issuing multiple SAFEs on inconsistent terms;
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be careful when granting additional rights to SAFE holders; and
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seek legal advice before finalising terms.
A well-structured SAFE round can support growth and simplify future funding. A poorly structured one can complicate the business long after the capital has been spent.
SAFE and Startup Funding Advice at O’Reilly Law
O’Reilly Law advises founders and startups across South Africa and Africa on early-stage fundraising, including SAFEs, convertible instruments, and priced equity rounds.
We help founders:
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structure SAFE rounds sensibly;
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model dilution and conversion outcomes;
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negotiate investor terms; and
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prepare for future funding rounds.
If you are considering using a SAFE — or reviewing one from an investor — we can help you understand what it really means for your business.
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