Raising capital with a SAFE: how it works, and what the founder gives up
A SAFE lets a company raise money without setting a valuation and without issuing shares now. The investor receives a right to shares on a future event. It is fast and cheap, and precisely for that reason it is easy to sign without understanding what happens in the next round. This page covers the mechanism and the components that determine how much you are diluted.
“The most favoured nation clause is the one the investor remembers and the founder forgets.”
Adv. Erez Sapir
What a SAFE is, and what it is not
SAFE stands for Simple Agreement for Future Equity. The investor transfers money today and receives in return a contractual right to receive shares on a defined future event, usually the next financing round.
What it is not matters just as much. It is not a loan. There is no principal to repay, no interest and no maturity date. And it does not confer shares now, so the investor is not a shareholder, has no vote and none of the rights attaching to a share.
Its main advantage is that it defers the valuation question. At an early stage the value of the company is a guess, and negotiating it is expensive and exhausting. A SAFE lets you raise now and leave the pricing to the moment when there is data to price against.
How the mechanism works
The investor transfers a sum. The agreement defines a conversion event, usually a future financing round above a defined size. When it occurs, the sum converts into shares at a price derived from the new round, with a benefit agreed in advance.
The agreement must also address two further events, and many forget them:
An exit before a round. If the company is sold before any round takes place, what does the investor receive. The accepted forms allow a choice between a return of the sum and conversion at the valuation cap.
Liquidation. Where a SAFE holder ranks relative to creditors and shareholders. This deserves express regulation.
And a third question people skip: what if a round never arrives. A company that keeps operating without raising leaves the SAFE hanging indefinitely, so some forms set a date or an alternative triggering event.
Valuation cap and discount
The two benefit mechanisms that reward the early investor for the risk:
Valuation cap. The maximum valuation at which the money will convert, even if the round is done at a far higher figure. This is the most significant component in the agreement, and therefore the one most negotiated.
Discount. A percentage off the share price in the round.
Where both exist, the mechanism more favourable to the investor usually applies. And here is the point founders miss: a low valuation cap looks like a small concession today and turns out to be large dilution tomorrow, precisely if the company succeeds. The higher the next round, the larger the early investor share becomes.
The most favoured nation clause
An MFN clause provides that if the company later signs a SAFE on better terms, the current investor becomes entitled to those terms.
For the investor it is sensible protection against someone who came later getting more. For a founder it is a constraint worth understanding: it limits flexibility in later rounds and in practice creates a floor that every future SAFE must meet.
The practical recommendation: keep an orderly table of every SAFE issued, showing amount, cap, discount and whether an MFN applies. Companies that raised across several small rounds discover at the real round that they do not know exactly how diluted they are, and that delays deals.
The dilution that appears in the next round
This is the central point of this page. A SAFE looks as though it costs nothing today, because there are no shares and no interest. The price is paid entirely in the future, and all at once.
The three recurring mistakes:
Raising several SAFEs in succession without a cumulative calculation. Each looks reasonable on its own, and together they produce dilution nobody planned.
Not checking the interaction with the employee option pool. In the round, the new investor will usually require the pool to be expanded before the investment, that is, at the expense of the founders. A SAFE combined with a pool expansion can reduce the founder share well beyond what they expect.
Not building a pro forma cap table. Before signing a SAFE it is worth modelling the next round at three valuation scenarios and seeing what is left. That is an hour of work, and it changes decisions.
SAFE against a convertible loan and a priced round
Convertible loan. Debt in every sense: interest, a maturity date, and if unconverted it can be called. It creates cash flow pressure, so it favours the investor more and the company less. Its advantage is familiarity and security from the investor side.
SAFE. No debt, no interest, no date. Simple and cheap, and the investor risk is higher.
A priced round. Valuation, share issue, a shareholders agreement and an investment agreement. Expensive and slow, and it delivers full certainty to both sides.
The practical rule: a SAFE suits an early and relatively modest raise with investors who know the instrument. Once the sum approaches the size of a real round, it is better to do a real round.
Israeli points worth knowing
The SAFE is not an Israeli standard. The accepted forms were written for the United States market. The governing law, jurisdiction and corporate terminology must be adapted to the Israeli Companies Law.
The articles and the shareholders agreement must speak to the SAFE. If the articles restrict allotment or give existing shareholders a right of first refusal, conversion may hit an obstacle. Check that before signing rather than at the round.
Tax. The conversion event and its consequences require examination with an accountant and a tax adviser, and sometimes with the tax authority. We do not set out figures or tax conclusions here.
Governance. SAFE holders are not shareholders, yet they expect updates. Define in the agreement what they receive and when. See corporate governance and shareholder rights.
Legal support
We support founders and investors in early stage raises. For a founder we build a dilution model before signature and adapt the form to Israeli law and to the company articles. For an investor we examine the conversion mechanics, the early exit scenario and the ranking in liquidation.
To reach us: 02-5953322 in Jerusalem, 03-3030430 in Tel Aviv, WhatsApp 050-4411343.
Frequently asked questions about SAFE agreements
What is a SAFE agreement?
What is the difference between a SAFE and a convertible loan?
What is a valuation cap and why does it matter?
What is an MFN clause?
What happens if a financing round never arrives?
Does a SAFE suit an Israeli company?
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