User Guide For SAFE Preferred Stock With Examples

The Simple Agreement for Future Equity (SAFE) was introduced in 2013 on the startup accelerator Y Combinator website as a suggested alternative to convertible notes.¹ A SAFE is a contract between a corporation and an investor. The investor pays in full up-front for the right to receive a variable number of shares of preferred stock as part of the corporation's first equity round.² Upon liquidation, a SAFE is typically subordinate to debt, on an equal footing with preferred stock, and ahead of common stock. SAFEs convert into preferred stock in connection with a corporation's first priced round, typically at a discount and sometimes with a valuation cap.³

The Y Combinator website noted in its 2013 introduction to SAFEs that while both SAFEs and convertible debt allow for faster and cheaper fundraising than issuing preferred stock, SAFEs were specifically engineered to avoid the complicated regulatory and tax issues associated with debt. Since their introduction,