Y Combinator Introduces New Simple Agreement for Future Equity (SAFE)

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Startup accelerator Y Combinator (YC) recently announced the release of new forms of Simple Agreement for Future Equity (SAFE). Originally created by YC in 2013, the SAFE is intended to streamline the process of raising capital by creating a simple, uniform standard for conducting an early-stage funding round, which can help startups save time and money that would otherwise be spent drafting one-off legal agreements.

In announcing the new forms, YC pointed to the shift in early-stage funding from raising small amounts of capital on a SAFE as a replacement for a convertible note bridge round to raising large amounts of capital on a SAFE as a replacement for a priced seed round.

The biggest change reflected in the new forms is that they provide for funding on a “post-money” basis instead of a “pre-money” basis. This means that ownership by a SAFE investor will be measured after (post) all capital raised from all SAFE investors (whether in one or multiple closings) but before (pre) new capital raised from equity investors in a priced round in which the SAFEs are converted into equity.

YC’s view is that by calculating SAFE investments on a post-money basis, founders can better understand how much of their company they are giving to SAFE investors and how much they will be diluted by the SAFE investments. The trade-off for this, however, is that every dollar raised on a post-money SAFE will only dilute the current stockholders of the company, which are often the founders and early employees. As such, startups should consider either increasing the valuation cap on a post-money SAFE or raising less money on a post-money SAFE.

The new SAFE forms contain a number of other changes, including with respect to the calculation of the valuation cap and any option pool increases, the priority of the SAFE upon a dissolution event, the treatment of the SAFE for tax purposes, the ability to amend the SAFE, and the grant of optional pro rata rights to SAFE investors.

In connection with the introduction of the new SAFE, YC announced that it is changing its standard accelerator investment terms from $120K for 7% on a pre-money SAFE to $150K for 7% on a post-money SAFE.

YC’s new post-money SAFE forms can be downloaded here.

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