SAFE Terms


As the startup ecosystem continues to evolve, innovative financing instruments like the Simple Agreement for Future Equity (SAFE) have gained significant traction. While SAFEs offer a streamlined and founder-friendly approach to fundraising, it is crucial for both investors and founders to understand the customary terms and provisions typically included in these agreements. In this post, we will consider certain customary terms that govern these investment vehicles. By gaining an understanding of these terms, startup founders and prospective investors can make informed decisions, negotiate effectively, and navigate the intricacies of SAFE agreements with confidence. So, whether you're an investor seeking to participate in early-stage financing or a founder looking to secure funding, let's explore the customary terms of SAFE agreements and unlock the key insights to help you succeed in the startup funding landscape.

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Conversion Triggers

The conversion trigger is a pivotal provision in a SAFE agreement that outlines the event or milestone that leads to the conversion of the investor's SAFE into equity. Common conversion triggers include a qualified financing round, such as an equity financing or the sale of the company, or the passage of a specific period of time. Once the trigger is met, the investor's SAFE investment converts into shares of preferred stock or other designated equity. This provision aligns the interests of the investor and the company, ensuring that the investor's contribution is recognized and rewarded when specific milestones are achieved.

Equity Financing

The equity financing conversion trigger in a SAFE refers to the occurrence of a qualified financing round in which the company raises a specified minimum amount of funding from external investors. Once this qualified financing takes place, the SAFE will automatically convert into equity based on the predetermined terms. The conversion ratio, which determines the number of shares the investor will receive, is typically established at the time of the equity financing. Such an "equity financing" is commonly defined in the SAFE to mean a transaction by the company that issued the SAFE whose main purpose is to raise capital by selling "preferred stock" at a fixed valuation (that is, a financing transaction where the company is given an agreed-upon value and the shares of preferred stock are priced accordingly. Commonly the first issuance of preferred stock following a company's initial SAFE's includes Series Seed Preferred Stock.

Liquidity Event

A liquidity event conversion trigger in a SAFE pertains to a significant event that provides the investor with an opportunity to convert their investment into equity. Common liquidity events include an initial public offering (IPO), where the company's shares become publicly traded, or the acquisition of the company by another entity. When a liquidity event occurs, the SAFE may convert into equity based on pre-agreed terms, allowing the investor to benefit from the liquidity and potential appreciation of the company's value. A "liquidity event" is often defined to mean either an IPO or other listing of the company's stock on a national stock exchange or a sale of the company or other change of control of the company.

Dissolution Event

The dissolution event conversion trigger refers to the end of the company ... its death before its time, so to speak. If the company faces bankruptcy or liquidation, this trigger may activate the conversion of the SAFE into equity. The terms of conversion in the event of dissolution are typically outlined in the SAFE agreement and may vary depending on the specific circumstances and negotiations between the parties. It's important to note that the specific terms and conditions associated with each conversion trigger can vary depending on the negotiated terms of the SAFE agreement. Founders and investors should carefully consider and clearly define these triggers to ensure their interests are protected and aligned with the company's growth and success. That said, a "dissolution event" excludes a Liquidity Event, and typically is defined to mean either a voluntary termination of operations (i.e., the board of directors decides to close up shop), or a general assignment of the company's asset for the benefit of its creditors (i.e., the company could not pay its debts and the creditors take their pound of flesh out of company properties), or any other liquidation, dissolution or winding up of the company.

Valuation Cap

A valuation cap ensures that early-stage investors have an opportunity to share in the company's success without being disproportionately diluted. It establishes the maximum valuation at which the investor's SAFE will convert into equity. The cap provides protection for the investor by setting an upper limit on the company's valuation for the purpose of conversion. If the company achieves a higher valuation during a subsequent financing round, the investor benefits from the pre-determined cap, allowing them to convert their investment at a more favorable price. Of course, if in the equity financing the company is given a valuation lower than the cap, the investor converts the SAFE at a price per share equal to the lowest price given to an investor paying with cash in that equity financing. That is, the SAFE investor gets the better of the two. The way it works (simply put) is that the SAFE purchase price is divided by the valuation cap amount to determine the number of shares (as a percentage of all shares) that the SAFE investor gets.  

Discount Rate

The discount rate provision of a SAFE agreement offers an incentive to early-stage investors. It entitles them to purchase shares of equity at a discounted price compared to later investors. The discount rate represents a percentage reduction from the future price per share in subsequent financing rounds. So, for example, if in a future equity financing, the SAFE holder has an 80% discount rate, and the "new money" investors purchase preferred stock for cash at a per-share price of $4.00, the SAFE will convert into a number of shares of preferred stock that equals the purchase price paid for the SAFE divided by $3.20 (rather than being divided by $4.00), resulting in more shares of preferred stock to the converting SAFE holder than the new-money investor would get for the same total purchase price. By availing themselves of this discount, investors are rewarded for their early support and willingness to take on higher risk. The discount rate provision serves as a mechanism to acknowledge and compensate early investors for their contribution. 

Conversion Mechanics

The conversion mechanics of a SAFE agreement details the process and methodology for converting the investor's SAFE into equity. Conversion mechanics ensure transparency and clarity, facilitating a smooth and straightforward conversion process for both the investor and the company. The conversion mechanics differ depending on whether the SAFE converts pursuant to a valuation cap or a discount rate, as is implied by the examples given above for the valuation cap and the discount rate.

Most Favored Nation

The Most Favored Nation (MFN) provision is a safeguard included in a SAFE agreement to protect the original investor from being disadvantaged in subsequent financing rounds. It ensures that if the company issues SAFEs to new investors on more favorable terms, such as a lower valuation cap or higher discount rate, the original investor automatically receives the benefit of those improved terms. The MFN provision prevents dilution and ensures fairness by allowing the original investor to align their terms with those of subsequent investors.

Investor Rights

The investor rights provision outlines the rights and privileges granted to the investor in connection with their SAFE investment. These rights can include information rights, enabling the investor to receive regular updates, financial statements, and other relevant company information. Additionally, investor rights may include pro-rata or other participation rights, which provide the investor with the opportunity to participate in future financing rounds, either to maintain their ownership percentage (pro rata rights) in in general (participation rights). Investor rights provisions vary depending on negotiations and the specific terms agreed upon.

No Maturity Date Or Interest

Unlike convertible notes, SAFEs do not have a maturity date or accrue interest. This means that the investor's return on investment is dependent on the occurrence of the conversion trigger or subsequent financing. The absence of a maturity date and interest provisions distinguishes SAFEs from debt instruments, allowing for a more flexible and equity-oriented investment structure that aligns with the unique needs and characteristics of early-stage startups.


The termination provision of a SAFE sets forth the conditions or events that lead to the termination of the SAFE agreement. Common termination triggers include the conversion of the SAFE into preferred stock in an Equity Financing, or the payment of the amount due to the SAFE holder in a Dissolution Event or a Liquidity Event. The termination provision ensures that both the company and the investor have a clear understanding of the circumstances under which the SAFE agreement may come to an end, providing a level of certainty and protection for all parties involved.

Additional Provisions

A SAFE may contain other provisions specific to deal negotiated between the company and the investor. Common additional terms include lock-up periods for the founders, non-disclosure terms, investment representations by the investors, representations by the company as to its formation and authorization to issue the SAFE, a dispute resolution clause, and others. A lock-up period is a period of time during which certain shareholders are restricted from selling their shares in order to maintain stability and preserve the market value of the stock to protect the investors' interests. Investor representations should include representations by the investors to the company, on which the company relies to decide whether to sell the SAFE, that it is an accredited investor (that is, it is legally permitted to participate transaction as a purchaser). The inclusion of other provisions in a SAFE agreement allows for customization and tailoring to address the unique requirements of the company and the investor. It is important for both parties to carefully consider and negotiate these additional provisions to ensure their interests are adequately protected.


Understanding the customary terms of SAFE agreements gives a glimpse into the unique appeal they hold for both startups and investors. By providing a streamlined investment structure, flexible conversion mechanics, and founder-friendly terms, SAFEs have become an attractive financing option in the startup ecosystem aligning the interests of investors and the issuing companies. The absence of maturity dates and interest components in SAFEs grants startups more flexibility while allowing investors to participate in the equity upside. SAFEs strike a balance that appeals to both parties, fostering a collaborative and growth-oriented approach to startup financing. 

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