A SAFE (Simple Agreement for Future Equity) is a founder-friendly fundraising instrument that lets startups raise money quickly without pricing the company or issuing shares immediately.
Created by Y Combinator in 2013, SAFEs have gained popularity in India’s early-stage ecosystem as an alternative to convertible notes or priced equity rounds, especially for startups raising from global investors.
What is a SAFE?
A SAFE is an agreement between a startup and an investor where the investor gives money today in exchange for a future equity stake, usually at the time of the next priced funding round.
It’s not a loan and doesn’t accrue interest. It also doesn’t come with a fixed maturity date or obligation to repay.
Instead, the SAFE converts into equity, typically common or preferred shares, once a triggering event occurs which is usually the next funding round or liquidity event.
Key Terms in a SAFE Agreement
| Term | What It Means |
|---|---|
| Valuation Cap | A maximum valuation at which the SAFE converts, giving early investors better terms than later ones. |
| Discount Rate | An optional % discount on the future price per share during conversion (e.g.: 15–25%). |
| Conversion Event | It’s a pre-agreed upon event which is typically the next priced equity round or acquisition. |
| Liquidity Event | If the startup is acquired before a conversion round, the SAFE may convert or provide a return. |
| MFN Clause | “Most Favoured Nation” clause gives investors the benefit of better terms offered in future SAFEs. |
Are SAFEs Legal in India?
SAFEs are not explicitly recognised under Indian company law. However, similar economic outcomes can be achieved through other legally compliant instruments:
- Indian startups incorporated in the U.S. (Delaware C-Corp) can use standard SAFEs when raising from global investors.
- Indian founders operating Indian-incorporated entities may structure SAFE-like agreements using Compulsorily Convertible Preference Shares (CCPS) or Compulsorily Convertible Debentures (CCDs) to comply with the Companies Act, FEMA, and SEBI regulations.
- iSAFE (India SAFE) instruments are sometimes used; these are typically structured as agreements to issue CCPS and are not as pure SAFEs in the US sense.
Key Point:
For Indian-incorporated companies, a “pure” SAFE (as used in the U.S. – a contract without a maturity date or interest, and not classified as equity or debt) sits in a regulatory gray area. This is due to compliance obligations under:
- SEBI (if the company is listed or planning to raise public funds),
- FEMA (if foreign investors are involved), and
- MCA (Companies Act governance for issuance of securities).
As a result, most Indian startups use CCPS or similarly structured instruments to replicate the economic effects of a SAFE while staying within regulatory bounds.
Example: SAFE in Action – YC-Backed Indian Startup
Let’s say a YC-backed Indian founder incorporates in Delaware to raise via YC’s standard SAFE.
Scenario:
- Investor invests ₹80 lakhs (~$100K)
- Valuation cap = ₹20 crore
- Next round (Series A) happens at ₹40 crore
Outcome:
The SAFE investor gets shares at ₹20 crore, effectively doubling their ownership value at conversion. No shares are issued at the time of investment, and there is no repayment obligation.
This structure is widely accepted in global fundraising but requires cross-border structuring if the startup operates in India.
Case Study: Early-Stage Startup Using SAFE-Like CCPS in India
A pre-seed fintech startup in Bangalore raised ₹1 crore from an angel investor using CCPS with conversion terms that mimicked a SAFE:
- No immediate pricing
- Conversion at next priced round with a 20% discount or ₹12 crore cap
- No interest or maturity
While technically not a SAFE, the economics and simplicity were the same making it similar to SAFE and compliant in India.
Pros and Cons of Using SAFEs
Advantages
- Simple & Fast: No upfront valuation negotiations or share structuring
- Founder-Friendly: Delays dilution until you’re in a stronger position
- Investor-Aligned: Early investors are rewarded with cap/discount benefits
- No Debt Pressure: Unlike convertible notes, SAFEs aren’t loans
Limitations (Especially in India)
- Regulatory Uncertainty: Pure SAFEs aren’t formally recognized under Indian Companies Act
- FEMA Restrictions: Cross-border fundraising via SAFEs can trigger compliance issues
- No Voting Rights: Until conversion, investors don’t participate in governance of the company
- Unclear Liquidation Outcomes: If the company exits before the conversion of the SAFE or iSAFE, investor protection terms, such as rights to proceeds or priority, must be explicitly defined to avoid disputes or unintended dilution.
When Should You Use a SAFE?
SAFEs are ideal when:
- You’re raising pre-seed or seed capital from friends, angels, or accelerators
- You don’t want to price the round yet
- You want to move fast without expensive legal processes
- You’re incorporated in the U.S. and planning to raise from global investors (YC, US angels, micro-VCs)
When NOT to Use a SAFE in India
Avoid SAFEs (or mimic them carefully) if:
- You are a private limited company in India raising from Indian investors
- You have complex cap table dynamics or multiple SAFEs
- You are unsure about your next priced round timeline
- You have risk-averse investors unfamiliar with equity instruments
Founder Tips
- Use cap table calculators to model dilution before agreeing to caps and discounts
- Clarify liquidity event terms in writing (what happens if there’s an acquisition before the next round?)
- Ensure all investors understand what a SAFE is and what it isn’t (not equity yet, not a loan either)
- If operating in India, consult a lawyer to structure SAFE-like terms via CCPS or CCDs
Final Thoughts
A SAFE is a powerful early-stage tool as it is fast, founder-friendly, and investor-aligned, but it needs careful use in the Indian context. Whether you’re raising via Delaware or mirroring the structure locally with convertible instruments, the key is to prioritise simplicity, clarity, and compliance.
Think of a SAFE as a promise: money now, equity later but only when everyone agrees on the terms.
Disclaimer: This blog is for informational purposes only and is not legal advice. Always consult a qualified legal professional before structuring your fundraising round.