What a SAFE is
A SAFE (“simple agreement for future equity”) lets an investor pay money now in exchange for the right to receive shares later — usually when the company raises a priced round. It isn’t a loan (no interest, no maturity date) and it isn’t equity yet. Y Combinator introduced it in 2013 and its post-money SAFE, standard since 2018, is the version most US investors expect.
Key terms
| Term | What it does |
|---|---|
| Valuation cap | The maximum valuation at which the SAFE converts. If the next round is priced higher, the SAFE investor converts at the cap. |
| Discount | A percentage off the next round’s share price (commonly 10–20%). |
| MFN | No cap or discount now; the investor gets the best terms of any later SAFE. |
| Pro rata side letter | An optional right to invest in the next priced round to keep their percentage. |
| Post-money | The cap includes all SAFE money, so each SAFE investor’s ownership is fixed at signing — and the founders absorb the dilution. |
A dilution example
- You raise $500,000 on post-money SAFEs with a $5,000,000 cap.
- Those investors will own $500,000 ÷ $5,000,000 = 10% of the company immediately before the priced round (subject to any option-pool changes the round requires).
- Raise another $500,000 on the same cap and SAFE holders reach about 20% — before the Series A investors take their share.
Stacking SAFEs across several caps is how founders lose more of their company than they expected. Keep a pro-forma cap table updated with every SAFE you sign — see fundraising advisory.
Delaware SAFE vs Indian iSAFE
| YC SAFE (Delaware C-Corp) | iSAFE (Indian company) | |
|---|---|---|
| Legal form | A contract for future equity | Issued as compulsorily convertible preference shares (CCPS) |
| Why | Delaware law permits the contractual right | Indian law doesn’t recognise a pure “right to future equity” outside share capital |
| Foreign investors | Standard for US funds and accelerators | Treated as capital instruments under FEMA — pricing rules and FC-GPR within 30 days of allotment |
| Company-law steps | Board approval; no share allotment until conversion | Companies Act private placement or preferential allotment process |
If US investors want to back you on YC SAFEs, you’ll need a US company — see US company registration and the Delaware flip guide.
FEMA points to check
- Founders in India: your own shares in the Delaware company are an overseas investment (Form FC, APR, Schedule FA). SAFE money coming in from foreign investors doesn’t add founder filings by itself, but conversion changes your percentage — keep the records current. See ODI rules for US companies.
- Indian resident angels investing into a US company’s SAFE are making an overseas investment under the Overseas Investment Rules, 2022 and LRS. How a SAFE is classified under those rules isn’t straightforward — they should take advice before remitting.
- If the Delaware company owns an Indian subsidiary, the SAFE proceeds that fund India arrive as foreign investment into the subsidiary — reported through FC-GPR (and FC-TRS for any transfers).
Common mistakes
- Signing SAFEs at different caps without a combined dilution model.
- Promising pro rata rights to everyone — they can crowd out your lead investor later.
- Issuing a US-style SAFE from an Indian company to a foreign investor, which doesn’t fit FEMA.
- Forgetting that the option pool expansion at the priced round usually dilutes founders, not SAFE holders.
Frequently asked questions
Can an Indian private limited company issue a YC SAFE?
Not in its US form. Indian law doesn't recognise a pure contractual right to future equity, so Indian startups use an iSAFE issued as compulsorily convertible preference shares, which follows Companies Act and — for foreign investors — FEMA rules.
What is a post-money SAFE?
The Y Combinator standard since 2018: the valuation cap includes all SAFE money raised, so each investor's percentage ownership on conversion is fixed at signing and founders bear the dilution from additional SAFEs.
How much dilution does a SAFE cause?
On a post-money SAFE, ownership is roughly the investment divided by the post-money valuation cap — for example $500,000 on a $5 million cap is about 10% before the priced round.
Can Indian resident angels invest in a US startup's SAFE?
It is an overseas investment under the Overseas Investment Rules, 2022 and the LRS framework, and how a SAFE is classified under those rules is not straightforward, so investors should take advice before remitting.
Please note: this guide is general information based on the rules as they stood on the review date above. Regulations and RBI/CBDT procedures change often — please get advice on your specific facts before acting.