Simple Agreement for Future Equity

A company at its earliest stage has nothing to price against. Whether it is worth $1.15 million or $2.3 million with no revenue and no users is a matter of instinct on both sides, and reconciling those instincts takes weeks. The money needed is $230,000 and it is needed now, and until recently the valuation had to be agreed first.

Agreeing on it only starts the work. Shares have to actually be issued, which means a shareholder meeting, amended articles, and a lawyer preparing documents. An angel investor putting in $23,000 can trigger several thousand dollars of process. And the number agreed on holds the company until the next round. Set it low with no basis and one decision made at pre-seed follows the company for years.

So a document appeared that postpones the pricing. A standard form published by an early-stage investor in 2013 made it common. A simple agreement for future equity (SAFE) takes the money now with no valuation attached, and when a real valuation is set at the next round, the equity gets calculated against that number. A convertible note solves the same problem as borrowed money, so it carries a maturity date and interest. A SAFE is not debt at all — it leaves behind only a right to future shares.

Five fields get filled in on a SAFE, and two of them effectively decide the ownership that results.

1. The amount. What is being wired now. One agreement covers one investment, so several investors mean several documents — which is part of why a round assembled this way can come together over a few weeks of separate conversations rather than one closing.
2. The valuation cap. The ceiling applied to the company's value when the agreement converts. Write a cap of $1.5 million and the investor converts at $1.5 million even if the next round prices the company at $3 million. Someone who put in $23,000 ends up with 1.5 percent rather than 0.75. This single line is most of the negotiation.
3. The discount. How much to cut from the price the next round sets — a 20 percent discount converts at $2.4 million in a $3 million round. When a cap and a discount both appear, whichever is better for the investor applies.
4. The conversion trigger. The events that turn the agreement into shares: usually the next priced round, an acquisition, or an IPO. There is no maturity date, so with no next round the agreement simply stays outstanding.
5. Extra rights. A most-favored-nation clause is the common one — the right to swap into better terms if the company later issues a SAFE on friendlier conditions.

Where the cap is measured from splits these into two kinds. The current standard, the post-money SAFE, reads the cap against total ownership after all SAFEs convert. That fixes the investor's percentage at signing, and any later dilution caused by further SAFEs falls on the founders. Under the older pre-money form, SAFE investors shared that dilution. The same $1.5 million cap produces founder ownership several points apart depending on which form it is.

The company usually writes it. The standard form comes off the shelf, the amount and cap and discount get filled in, and a founder sends it — often with a lawyer checking the numbers rather than the clauses. That is why one of these can close in two weeks.

Three parties read it, and each looks at something different.

1. The investor putting money in now reads the cap and the discount. Skipping the valuation is the trade; getting a better basis than whatever gets set later is the compensation, which makes those two lines the entire deal.
2. The next round's investors and whoever runs due diligence read the SAFEs as a table. How many were issued, for how much in total, at which caps — enough to calculate what the capitalization table looks like after conversion. When that calculation surprises anyone, Series A terms get renegotiated around it.
3. The founder is the third reader. A SAFE doesn't appear as shares on the cap table until it converts, and then it appears all at once. Keeping the count, the total, and the caps in one table with a current percentage next to them is the only way to avoid a surprise.

Two working rules hold this together: don't write a different cap on every document, and don't let the total raised on SAFEs grow out of proportion to the round that will absorb them. Both rules exist because the documents are easy to issue and the consequences all arrive on the same day.

"Let's do this one on a SAFE — $1.5 million cap, no discount."

Close it quickly with a ceiling instead of a valuation.

"There are five SAFEs out and every cap is different. Has anyone worked out the combined percentage after conversion?"

Different bases mean the post-conversion ownership has to be computed separately.

"That SAFE is post-money, so all the dilution after it lands on us."

The investor's percentage is fixed, and the founders absorb what follows.

Pagedeck raised $230,000 at pre-seed across four SAFEs. All four carried the same $1.5 million cap, and Grace kept that table next to the cap table with the post-conversion percentages written in.

In the Series A negotiation, the first thing the investors asked was what founder ownership looked like after conversion, and the table answered it in the room. With the arithmetic already done, the conversation moved straight to terms.

The first assumption is that no valuation means no dilution. The cap table doesn't move in the month of signing, so it looks that way. But the dilution wasn't avoided, only deferred to the conversion date. Take $230,000 at a $1.5 million cap and roughly 15 percent shows up in one step, arriving in the same month as the new investor's share. Put off that arithmetic and the founders learn their own ownership during the Series A negotiation.

The second is that a standard form leaves nothing to negotiate. The clauses are fixed and only a few boxes are open, which makes it look settled. But those few boxes are the whole deal. A $1.5 million cap versus a $2.3 million cap turns the same $23,000 into 1.5 percent or 1 percent. Whether it is written post-money decides who absorbs the dilution that comes after. A short document and light terms are not the same thing.