How a SAFE converts
A SAFE, or simple agreement for future equity, gives the investor a right to receive shares in a later priced financing instead of shares today. It usually carries no interest rate or maturity date, which is one way it differs from a convertible note. The economics come from the valuation cap, the discount, or both, and from whether the instrument is written on a pre-money or post-money basis. Most forms also address what happens if the company is sold or winds down before a financing occurs. Because the conversion math is deferred, founders who sign several SAFEs on different terms are sometimes surprised by how much ownership has been promised once a round finally prices.
Securities rules still apply
Calling the instrument simple does not take it outside securities law. A SAFE is a security, and issuing one generally requires an exemption from registration, together with whatever federal notice and state filings that exemption calls for. Who the investors are matters, because some exemptions are built around accredited investors and restrict how the offering may be advertised. Side letters granting information rights, pro rata rights, or most-favored-nation treatment should be tracked carefully, since they can conflict with one another and with later financing terms. The tax treatment of SAFEs is not fully settled, so check with a tax adviser before assuming how a particular instrument will be treated.
Before signing or issuing another one
For founders, the useful exercise is a capitalization model that shows ownership after conversion under a few realistic financing scenarios. For investors, the questions are what the cap really means at the likely round size, and what rights you hold if the company never raises again. We review the form being used, any changes made to the standard version, and the full stack of SAFEs and notes already outstanding. It helps to send the draft, the current cap table, and any side letters ahead of time. From there we can point out which terms are worth negotiating and which departures from the common form deserve a question.
