Why SAFEs Are a Popular Startup Fundraising Tool — and What Founders Should Know
Simple Agreements for Future Equity (SAFEs) help startups raise early money fast, but they come with risks that founders and investors need to understand.
SAFEs: A Go-To for Early Startup Fundraising
In the world of startup funding, SAFEs — or Simple Agreements for Future Equity — have become a popular way for young companies to raise money quickly. Introduced by Y Combinator in 2013, SAFEs are now used in nearly 90% of early-stage startup rounds, according to Carta’s 2024 data.
Unlike traditional loans or equity deals, SAFEs let startups raise capital without taking on debt or giving up immediate ownership. Instead, investors receive the right to convert their investment into equity during a future funding round — often at a discount or with a valuation cap.
Understanding Terms: Caps, Discounts, and Dilution
Most SAFEs include a valuation cap. In 2024, 62% of SAFEs used caps only, 29% included both caps and discounts, and just 9% offered a discount alone. SAFEs with no cap or discount are now almost unheard of.
While SAFEs are generally favorable for startups, they can lead to unexpected dilution — especially when many SAFEs are issued with different terms. Founders often raise from multiple investors using separate SAFEs, which can make the company’s ownership structure hard to track. Today, large SAFE rounds can dilute founder ownership by around 20%.
Raising large amounts through SAFEs with low post-money valuation caps can increase this risk. Since SAFE investors lock in their ownership percentage, founders may end up giving away more of the company than expected.
From Pre-Money to Post-Money SAFEs
Originally, SAFEs calculated ownership using a “pre-money” method, making it hard to predict dilution. That changed in 2018 when Y Combinator introduced the “post-money” SAFE. This newer version gives investors a clearer picture of how much of the startup they will own after a priced round.
Advertisement
Multiplier | The World's Leading Global Human Platform
Multiplier is a leading global employment platform that manages employment, payroll & compliance for International Teams. Multiplier makes it easy to hire, onboard, manage, and pay employees and contractors around the world. We offer end-to-end global employee management – All in one place!
For example, an investment of $150,000 with a $15 million post-money cap guarantees the investor at least 1% ownership before the next equity round. This fixed ownership percentage protects investors from being diluted by later SAFEs or bridge notes.
However, this clarity comes at a cost to founders. If the startup struggles and needs to raise more money at a lower valuation, existing SAFE investors keep their guaranteed stake — increasing the dilution impact on the founding team.
Today, over 85% of SAFEs use the post-money structure.
Pros and Cons for Startups and Investors
For startups, SAFEs are quick, affordable, and don’t require interest payments or complex legal work. Founders keep control while raising early funds, making SAFEs an attractive option for getting off the ground.
Still, the downsides matter. Founders often overlook the long-term impact on ownership, especially with post-money SAFEs. Too many SAFEs can cause confusion in later funding rounds, leading to legal cleanups and conflicts with new investors.
On the investor side, SAFEs are easy to use and give early access to promising startups. But they also carry risk: if there’s no future equity round, the SAFE might never convert, leaving the investor with nothing. SAFEs also don’t provide voting rights or board seats, making them less appealing to conservative investors.
What’s Next for Startup Fundraising?
As the startup funding landscape adjusts post-2021, SAFEs remain a top choice for early-stage capital — especially in fast-moving sectors like AI. Their speed and simplicity help startups act quickly, but founders must be careful.
Used wisely, SAFEs can be a powerful fundraising tool. But for any startup, understanding the terms, the risks, and the impact on ownership is critical to long-term success.