SAFE: A Simple Tool for Early-Stage Startup Funding
SAFE: A Fast Track for Early-Stage Startup Investments? Where the Convertible Loan Agreement (CLA) has long been familiar, the SAFE is rapidly gaining ground. This article explains everything you need to know about SAFEs.
For innovative startups, early-stage funding is critical to develop their product. Investments are needed at a time when revenue is typically non-existent (pre-revenue). Traditional bank loans are not an option at this stage. While the Convertible Loan Agreement (CLA) has been widely used in the Netherlands, the SAFE (Simple Agreement for Future Equity) is quickly becoming a popular alternative.
Selling shares early is often undesirable for both founders and investors. For founders, valuations immediately after incorporation are too low, causing excessive dilution. For investors, the risk-reward ratio is skewed, or a reliable valuation simply cannot be established. CLAs have therefore been a common solution. The SAFE offers another option: a streamlined (simple) agreement for future equity.
Priced Round versus Convertible Round
Priced round
When startups raise capital by issuing shares at a fixed price per share, the company is valued and the round is considered a “priced round.” Founders know exactly how many shares they will issue and how much dilution they will face. Investors know their precise ownership stake. Shares carry voting rights, and under the shareholders’ agreement, investors typically receive information rights and sometimes veto rights. Most Series A and later rounds are priced rounds.
Convertible round (unpriced round)
In the early stages (pre-seed, seed, late seed), rounds are often “unpriced.” These rounds use instruments that convert into equity later, once a valuation is negotiated or set by new investors. At this stage, startups are usually focused on product development and finding product-market fit, with little or no revenue. Valuation is difficult. SAFEs and CLAs are therefore common tools for raising capital.
A CLA is a loan that accrues interest and may convert into shares later, typically at the next priced round, based on the loan amount plus accrued interest. Conversion may be optional for the investor. A SAFE is simpler: it is an agreement where the investor prepays for future shares, converting at the next priced equity round. Unlike a CLA, a SAFE is not a loan—there is no repayment obligation and no interest. SAFEs usually include a valuation cap and/or discount rate to reward early risk-taking. More on that below.
Both SAFEs and CLAs are designed to structure investments quickly and defer valuation until the next equity financing. SAFEs require less documentation than a share issuance and no notary involvement. Templates are widely available, reducing costs. However, as always, the devil is in the details. Post-money SAFEs can lead to significant dilution for founders if not carefully managed. Some investors prefer priced rounds because valuation is a core part of their decision-making. Not all investors will accept SAFEs, which can complicate fundraising.
In this Article you will learn:
- What a SAFE is and how it works
- Key legal and tax considerations under Dutch law
- Strategic advantages for startups and investors
- Essential clauses to include
- How to choose the right instrument for your round
01 What is a SAFE?
Developed by Y Combinator in the U.S. as a simpler alternative to convertible notes, the SAFE became a standard for early-stage funding. The concept: the investor prepays for future shares, converting at the next equity financing (priced round). Unlike many CLAs, SAFEs typically have no maturity date, no interest, and no repayment obligation. They often include a valuation cap and/or discount rate, giving the investor a better price per share than new investors in the priced round.
SAFEs work for Dutch B.V.s and N.V.s because they convert into shares. Foundations, associations, and cooperatives cannot use SAFEs. U.S. templates need adjustments for Dutch corporate law, particularly around shareholder resolutions and pre-emptive rights.
Who uses SAFEs? Seed-stage startups often raise SAFE funding from angel investors, early-stage VC funds, accelerators, and friends & family. Family offices and other investors are increasingly familiar with SAFEs. International investors also favor SAFEs because they are widely recognized and easy to implement across jurisdictions.
02 SAFE Classification: Debt or Equity?
In the U.S., SAFEs are treated as irrevocable capital contributions, not loans, and taxed under capital gains rules. In the Netherlands, classification is less clear. With no repayment obligation and no interest, SAFEs resemble equity. However, if the SAFE includes a contractual right to repayment (e.g., upon dissolution), it may be treated as debt. Each case requires careful analysis.
03 Essential SAFE terms
Trigger events: In a SAFE, it is absolutely critical to define clearly when conversion into shares will occur. Typically, conversion happens at the next equity financing or “Qualified Financing.” Equity Financing is often described as “the next issuance of new shares,” meaning that every share issuance could, in theory, trigger conversion. However, not all SAFEs work this way. Some agreements specify that only share issuances above a certain minimum investment amount qualify as an Equity Financing and therefore trigger conversion. This is why it is essential to agree upfront on what constitutes an Equity Financing or Qualified Financing and under which circumstances the SAFE will convert.
Most SAFEs also include provisions for Liquidity Events and Dissolution Events. A Liquidity Event can include a sale of shares by the founders, a change of control (for example, following such a share sale or a merger), an IPO, or even the sale of all or substantially all of the startup’s assets. A Dissolution Event refers to winding up or termination of the business. In these scenarios, the SAFE investor must be compensated—either through repayment or by issuing shares.
Cash compensation is often calculated based on what the investor would have received if the SAFE had converted immediately before the Liquidity Event. In some cases, a fixed cash payout is agreed upon, commonly 1x or 2x the SAFE amount. The Y Combinator model goes further by attaching a liquidation preference to the SAFE, functioning as a standard non-participating liquidation preference on preferred shares. This means that, at least according to the contract, the SAFE investor ranks ahead of certain other creditors in the payout waterfall.
Conversion of SAFE shares: A SAFE agreement typically specifies, often in the definitions section, the type of shares into which the SAFE will convert during a priced round. In most cases, these are “preferred shares,” meaning the most senior class of shares issued to investors in that priced equity financing. Templates can be adapted to reflect different structures. For example, if investors are expected to convert into certificates via a STAK (Dutch trust office foundation, stichting) or into cooperative membership interests in a cooperative association (coöperatie), the SAFE agreement is the right place to capture those details explicitly. Without any alternative arrangement, conversion will default to preferred shares.
Valuation Caps: A SAFE includes a formula that determines, at the time of the equity financing, how many preferred shares the investor will receive upon conversion. The starting point for this calculation is the price per share paid by new investors in that priced round. From there, the SAFE may apply a discount to that price per share, giving the SAFE investor a more favorable entry point.
In addition to discounts, SAFEs often feature a valuation cap: a maximum company valuation for conversion purposes. If the startup’s valuation in the equity financing exceeds the agreed valuation cap, the lower capped valuation is used to calculate the conversion price per share instead of the actual higher valuation. This mechanism ensures that early investors are rewarded for taking on greater risk by securing a better price per share than later investors.
It is absolutely essential to be clear on whether the SAFE uses a pre-money valuation cap or a post-money valuation cap, as the difference significantly impacts dilution. The following examples illustrate this distinction:
Pre-money SAFE
An investor contributes €500,000 under a SAFE with a pre-money valuation cap of €2,500,000. At the time of the equity financing, the startup has 120,000 shares outstanding on a fully diluted basis. The conversion price per share is calculated as follows: Price per share = €2,500,000 divided by 120,000 shares = €20.83.
The investor’s €500,000 investment divided by €20.83 results in 24,000 shares, giving the investor 16.67% ownership after conversion.
Post-money SAFE
An investor contributes €500,000 under a SAFE with a post-money valuation cap of €2,500,000. In this case, the investor’s ownership percentage is calculated by dividing the investment amount by the post-money valuation cap: €500,000 divided by €2,500,000 = 0.2 or 20%.
This means the investor is entitled to 20% of the company after conversion. Assuming the company had 120,000 shares outstanding before conversion, the investor would receive 30,000 new shares, resulting in a total of 150,000 shares post-financing (30,000 ÷ 150,000 = 20%).
In most templates, a post-money valuation cap represents the ceiling or maximum valuation including all SAFE investments. A pre-money valuation cap, on the other hand, applies before the company receives any SAFE (or other convertible) investments. These two concepts are closely related but refer to different points in time.
Put simply: Pre-money cap = Post-money cap minus SAFE amounts.
This distinction matters because stacking multiple SAFEs can unintentionally lead to significant dilution for founders. Every additional SAFE effectively reduces the pre-money cap, meaning that dilution from subsequent SAFEs falls entirely on the founders. Careful modeling of the cap table is essential to avoid surprises.
Discount: The discount in a SAFE gives investors a reduced price per share compared to new investors in the priced round or equity financing. It is an alternative method for calculating the number of shares issued upon conversion when no valuation cap is agreed or when the priced round valuation is lower than the agreed cap. If both a discount and a valuation cap apply, the investor typically receives the more favorable outcome of the two conversion formulas.
Most Favored Nation: Some investors request an MFN clause to ensure they automatically receive an upgrade if later SAFEs are issued on better terms. For example, if subsequent investors negotiate a lower valuation cap or a higher discount, the original investor’s SAFE terms are adjusted accordingly. Once the SAFE converts into shares, the MFN clause no longer applies.
Pro rata rights: Under Dutch law and most articles of association, shareholders generally have pre-emptive rights on new share issuances, allowing them to purchase a pro rata portion of new shares to avoid dilution—provided they are willing to invest additional capital (“pay or dilute”). A SAFE investor is not yet a shareholder but often wants the right to participate in future rounds, such as the equity financing, to maintain ownership percentage.
For this reason, SAFE agreements frequently include pro rata rights—typically documented in a side letter rather than the main agreement. This side letter is signed simultaneously with the SAFE and cross-referenced to it. Its purpose is to guarantee the investor the opportunity to maintain their stake in the company during future capital raises, provided they actively participate in those rounds.
04 Strategic advantages
Solving the valuation challenge in early stages: Valuing young companies is inherently difficult. Traditional methods such as EBITDA multiples or discounted cash flow analyses fail to capture growth potential. A SAFE allows valuation to be deferred until the startup has built a financial track record and a more predictable growth trajectory—aligning valuation with that of future investors during an equity financing round.
Accelerated fundraising process: Another major advantage of SAFEs is speed. SAFEs can significantly shorten the fundraising timeline. Numerous templates are available, and notarial involvement is avoided because shares do not need to be issued immediately. Negotiations over shareholders’ agreements are postponed, reducing legal complexity and making the instrument attractive. Templates are widely accessible and require only minor adjustments for Dutch law, even in an international context—making SAFEs appealing to foreign investors as well.
05 Challenges
Not all investors accept SAFEs: Some investors are unwilling to postpone valuation. Conversely, those same investors may also be less inclined to invest in the seed stage, which requires a higher risk tolerance.
Dilution risk: Founders must maintain an accurate and up-to-date cap table to avoid unpleasant surprises when converting post-money capped SAFEs. Mismanagement here can lead to significant unintended dilution.
Legal requirements: Under Dutch corporate law, SAFEs qualify as “rights to future share issuance.” This requires a shareholder resolution and may trigger pre-emptive rights unless these are excluded. Proper documentation of the shareholder resolution (and sometimes supervisory board approval) is legally necessary.
Template pitfalls: Online templates often come with additional side letters that favor investor interests. This is particularly true for provisions on reserved matters, warranties, and covenants. Such clauses can severely restrict operational flexibility by requiring investor approval for even routine decisions. For startups, maintaining fast governance and avoiding blocking rights by minority investors is critical—ensure approval processes remain light and efficient. Both founders and investors should be aware of these pitfalls.
Specialized fundraising support
Navigating fundraising requires strategic legal advice tailored to your industry, business model, and stakeholders.
INC.’s specialized team provides comprehensive support to founders and investors throughout the entire financing process—from designing pitch decks and modeling cap tables to initial negotiations, documentation, conversion, and beyond.
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