Simple Agreement for Future Equity (SAFE) is a financing instrument used in startup capital raising that gives an investor the right to receive shares in a future equity round if specified events occur. SAFEs allow startups to raise capital quickly while deferring valuation and share issuance until a later funding round.
SAFEs have become a common feature of early-stage capital raising in Australia, particularly at pre-seed and seed stage. They are often described as a faster, simpler alternative to convertible notes, and are designed to help companies raise capital without setting a valuation or issuing shares upfront.
Despite their reputation for simplicity, SAFEs can have a significant impact on ownership and dilution once conversion occurs. Understanding whether to enter into a SAFE requires careful consideration of how they operate, how conversion mechanics work, and which terms most strongly influence founder outcomes and is the subject of this article in our series.
SAFE Key Terms at a Glance
Although SAFEs are often described as simple instruments, their economic outcome depends on several core terms.
- Qualifying financing – the future equity round that triggers conversion of the SAFE.
- Valuation cap – the maximum valuation at which the SAFE converts into shares.
- Discount – a percentage reduction applied to the price paid by new investors.
- Conversion price – the formula determining how many shares the SAFE investor receives.
- Liquidity provisions – terms that determine what happens if the company is sold before conversion.
We explain each of these concepts in more detail below.
What a SAFE Is (and What It Is Not)
SAFEs create contractual rights to receive shares in the future if specified events occur. Basically, an investor provides capital now, and in return gains the right to be issued shares later, typically in connection with a priced equity round or exit.
SAFEs do not, on their own, alter the company’s issued share capital or voting structure at the time they are issued, because the investor does not receive shares and does not become a shareholder. Any change to ownership occurs only if and when the SAFE converts in accordance with its terms. Until that point, the investor has no voting rights, no entitlement to dividends and does not participate in shareholder decision-making. Their position remains purely contractual, with any economic exposure tied to the potential future issue of shares.
Critically, a SAFE is generally not a debt instrument. Unlike a convertible note, it typically does not accrue interest, has no maturity date and does not give the investor a right to repayment in the ordinary course. Instead, the investor’s upside is tied almost entirely to equity outcomes.
This non-debt structure removes some pressure points for startups and scaleups, but it also means the conversion mechanics carry greater weight. It also means the economic deal sits largely in the formula.
Although SAFEs are often described as simple instruments, the way their key terms interact can materially affect dilution and future funding rounds. Our capital raising lawyers regularly assist founders and investors in structuring SAFEs so the terms remain workable as the business grows.
SAFE key terms and how they work together
While a SAFE is often described as a simple instrument, its practical effect is driven by a small number of interlocking terms. These terms determine when the SAFE converts, how the conversion price is calculated, and how the investor is treated if the company is sold or wound up before a priced equity round.
Below we outline the key operative terms commonly found in SAFEs, including qualifying financing thresholds, valuation caps, discounts, conversion formulas and liquidity event treatment. Together, these provisions determine when the SAFE moves from a contractual right into issued shares. Because they operate collectively, changes to one term can materially affect the outcome of the others, particularly at the point of conversion.
Qualifying Financing Provisions
SAFEs typically include a defined term such as Qualifying Financing or Equity Financing. This provision sets out the type of capital raising that will trigger conversion.
In practice, the provision usually specifies:
- that the financing must be a priced equity round; and
- that a minimum amount must be raised before conversion occurs.
The purpose of this provision is to ensure conversion is tied to a meaningful equity round rather than being triggered by every issue of shares. For startups and scaleups, the way this term is drafted determines which future capital raisings will — and will not — cause SAFEs to convert.
If the threshold is set too low, conversion may occur earlier than expected; if it is set too high, renegotiation may be required at an inconvenient time. Tailored advice from capital raising lawyers can often help ensure the threshold aligns with the company’s broader fundraising strategy. If you would like to discuss your circumstances, feel free to get in touch here
Valuation Caps in SAFEs
The valuation cap sets the maximum valuation at which the SAFE will convert in a qualifying equity financing.
In practice, the provision operates by fixing a conversion price by reference to the valuation cap rather than the price per share paid by new investors where the round valuation exceeds the cap. The result is that the SAFE investor receives more shares than they would if conversion occurred solely at the priced round valuation.
Although the cap does not determine the company’s valuation, it effectively prices part of the equity round in advance. For startups and scaleups, it is therefore one of the most commercially significant SAFE provisions, as it can directly influence dilution and ownership outcomes once conversion occurs. These mechanics are often carefully modelled in advance, and experienced capital raising lawyers can assist founders in ensuring the cap aligns with the company’s broader fundraising strategy.
Discount Provisions
Discount provisions give the SAFE investor the right to convert at a price per share lower than the price paid by new investors in a qualifying equity financing.
The SAFE typically specifies a percentage discount and the method used to apply that discount to the financing price in order to determine the conversion price. Where a SAFE includes both a discount and a valuation cap, the investor is usually entitled to whichever mechanism produces the more favourable outcome.
In practice, discounts tend to be most relevant in lower or moderately priced rounds. In higher-growth scenarios, the valuation cap is more likely to determine the conversion outcome, with the discount operating as a secondary protection rather than the primary economic lever.
Conversion Price Formula in SAFEs
The conversion price formula determines how many shares are issued to the SAFE investor on conversion.
This formula typically links the price per share in the qualifying equity financing with the valuation cap and any applicable discount. Rather than operating independently, these elements are applied through the conversion formula to produce a single conversion price, which is then used to calculate the number of shares issued.
For startups and scaleups, this provision is where the SAFE’s commercial terms crystallise into ownership outcomes. Even where headline terms appear straightforward, small differences in the conversion formula or the assumptions underlying it can materially affect dilution once conversion occurs.
Pre-money and post-money capitalisation provisions in SAFEs
SAFEs typically include a capitalisation definition that determines how the company’s share capital is measured for the purpose of applying the valuation cap
In practice, this definition specifies whether the valuation cap is applied on a pre-money or post-money basis. In a post-money SAFE, the capitalisation includes the shares issued on conversion of the SAFE itself, providing clearer visibility of the effective ownership being issued. In a pre-money SAFE, the capitalisation is measured before SAFE conversion, which can result in greater uncertainty around dilution.
For startups and scaleups issuing multiple SAFEs over time, the capitalisation definition is particularly important. Inconsistent or poorly understood definitions can compound dilution across instruments and make ownership outcomes difficult to model until conversion occurs.
Liquidity Provisions: Exit Events
SAFEs typically include liquidity event provisions that govern what happens if the company completes a sale, merger, IPO or other change-of-control transaction before a qualifying equity financing. This creates a separate pathway for dealing with the SAFE and operates independently of the equity financing conversion provisions.
If an exit event occurs before a priced round, the SAFE will specify how the investor’s position is treated. Depending on the drafting, the provisions may provide for conversion of the SAFE into shares immediately prior to completion of the transaction, a cash payment calculated by reference to the investment amount (sometimes subject to a multiple or cap), or a right for the investor to elect between those outcomes.
These provisions determine whether the SAFE investor participates in exit proceeds as an equity holder, receives a defined cash return, or can choose between the two. For startups and scaleups, this means a SAFE can materially affect exit economics even where no priced equity round has occurred, particularly in earlier or opportunistic acquisitions.
Termination Provisions
SAFEs typically include termination provisions that address what happens if the company is wound up or dissolved before the SAFE converts.
These provisions determine whether the SAFE investor is entitled to any return of capital and how they rank relative to shareholders in a winding-up scenario. Depending on the drafting, the investor may be entitled to a priority payment up to their investment amount, or may rank alongside ordinary shareholders. These provisions address downside scenarios and are distinct from liquidity event mechanics, which are usually dealt with separately in the SAFE.
Although often given little attention at early stages, termination provisions allocate downside risk and can materially affect outcomes if the business does not progress to a priced equity round.
Final Thoughts
Used carefully and as part of a clear funding strategy, SAFEs can provide an effective bridge to a priced equity round. However, their practical impact depends less on the simplicity of the document itself and more on how the key terms operate together over time.
As with any alternative financing instrument, seeking advice from experienced capital raising lawyers can help clarify the mechanics and how they may apply in specific circumstances. If you are considering issuing a SAFE or reviewing existing instruments, early guidance can help ensure the terms remain workable as your business grows. Feel free to reach out to one of our capital raising lawyers here.
