Carolynn Levy, inventor of the SAFE
Levy shares how she wrote the five-page document that underpins much of early-stage venture capital today.
Written by Meghna Rao
Photography by Derek Yarra
“The one thing that irks me is when people call it a SAFE note,” Carolynn Levy laughs. “It’s just SAFE and it’s not a note.” She gives me a look. This is clearly a common mistake. “We wrote it so it was different from the convertible note, to show that it was equity and not debt, that it was meant to be founder friendly, and philosophically in line with the entire process of raising early-stage capital.”
Levy is speaking to me from her earth-toned home in California and not from the famous citrus walls of the Y Combinator (YC) office, where she wrote the SAFE (Simple Agreement for Future Equity) in the winter of 2013. Still, she paints a vivid scene of the days in which the document — the five pages that have now become ubiquitous with raising early-stage venture capital in Silicon Valley — was penned.
Imagine: It’s December of 2013, a mild San Francisco winter. Levy, a UCLA and USF-educated lawyer, had been at YC for a little over a year, working on a two-person legal counsel team that included her husband Jon. Together, they would guide young startups through the complicated legal landscape for early-stage companies — getting incorporated, setting up the right structures to hire employees, fundraising.
Levy’s decision to join YC had been a long time in the making. She first encountered the accelerator in 2006, when a young founder by the name of Sam Altman was part of its initial batch and reached out to her for help with his first startup, Loopt. A few months later, Altman introduced Levy to Paul Graham and Jessica Livingston, two recent Cambridge immigrants who were running Y Combinator, a “small family business” that gave young startups enough money for rent and pizza so they could focus on getting their idea off the ground.
"PG [Paul Graham] would say to me, Clevy, we need to fix early-stage financing. If we do that, it will do wonders for the ecosystem," says Levy.
“I’d been working with them and loved what they did. Then, YC got health insurance so I decided to join full-time,” she laughs.
The venture funding landscape that Levy was dealing with was messy. Any legal innovation that had sprouted was like a green bud that had pushed its way through sidewalk cracks. The convertible note was one of these green buds: founders were learning that priced rounds — like seed rounds and Series As — took far too much time, effort, and money to coordinate while they were running their businesses. But they still needed money to grow, and sometimes, they needed a little stepping stone before they sat down to organize a full priced round.
Enter convertible notes. These were loans that founders could get from investors with the promise of issuing them shares later, either at a specific “maturity date” or the next time their startup raised a priced round, whichever came first. The notes gathered interest that was paid back, along with the principal, in the form of shares. Founders could use them to set different terms for different investors. And they were quick and easy to complete.
“It was really inventive,” says Levy. “The convertible notes had come from this structure that already existed, the bridge loan. Startup lawyers had pulled it out to have the convertible note act as its own thing for startups. It was great, so natural. And founders all over Silicon Valley were using them.”
But Levy still believed that there could be something better than promissory notes for founders to raise early money. She explains that while natural solutions can emerge on their own, they are sometimes an indicator for a better structure that can be built in their place. The added work that came with convertible notes — negotiating interest rates with investors, keeping an eye on maturity dates — almost negated their time-saving benefits.
The worst problem of all, says Levy, was a philosophical one. Convertible notes were debt and venture capital was based on equity. They just didn’t make sense together.
“Do you want to start your relationship off with your investor arguing whether interest on your convertible note should be 3% or 10%? Or overthinking about your maturity date and not your startup’s runway? We would see Excel sheets with maturity dates on them with different scenarios showing how much money a founder would have depending on when they converted. Did anyone need that hassle?”
“That is just not good for the ecosystem,” she says. “PG [Paul Graham] would say to me, Clevy, we need to fix early-stage financing. If we do that, it will do wonders for the ecosystem. PG was the inspiration for the SAFE. And I realized that now, I wasn’t at a law firm anymore, I was at YC, and this was something that I could do."
So Levy set herself to work to write the SAFE. First, Levy, Jon, and others like Kirsty Nathoo, YC’s first employee and now its CFO, parsed through the convertible note. They highlighted what they knew founders liked about it — being able to move fast, get money quickly, put off settling on major terms until they were ready, and setting different terms for different investors. Then, they outlined what they felt wasn’t working — the interest rates, the maturity date, the fact that the money was debt.
And then, there was the document’s length (the current convertible note is 13 pages). If the premise was to be user-friendly, it would have to be easy to read — even for those who didn't have a strong grasp over legalese. “Writing a short legal document is actually quite hard,” says Levy. “It’s a cliche — the simpler it is, the harder it is to do, and us lawyers are so used to writing for each other and not thinking about how short things should be.”
“The idea itself wasn't the innovation,” adds Nathoo. “The concept was similar to the convertible note. The innovation was writing such a short document without any of the complex pieces.”
And for the SAFE to have real impact, the group decided, it couldn’t just target founders; investors would have to like using it too. With that goal came clauses like pro rata participation in the next round of financing — this allowed SAFE investors to purchase further shares in a company when it raised another financing.
When Levy finally published the SAFE on YC's website, it was a slim five pages. It was first put into use in YC’s 2014 winter batch, which included Flexport, Cruise, and Abacus, $125K in a SAFE for 7% of each of these companies.
It’s easy to picture how the SAFE went viral: Anyone familiar with startups knows that YC is certainly not a “family business” any more. The accelerator has invested in 3500+ startups and has a total valuation nearing $1T, with tech industry luminaries like Stripe, Airbnb, Coinbase, Twitch, and OpenSea getting their starts there.
A broad range of VCs would come to encounter the SAFE as these companies grew and raised more rounds. In their earliest stages, these companies would be trained to look to the SAFE whenever they thought about early-stage financing. The SAFE’s presence on the YC website made it easy to access for everyone, especially those looking to cut costs on lawyers. Startups that wanted to be like YC companies would use it; investors that wanted to invest like YC would use it.
Shortly after the SAFE was first released in the winter of 2014, 500 Startups followed up with the KISS (Keep it Simple Security) documents, which included an updated convertible note — it did not experience anything near the virality of the SAFE.
And this virality was not something that Levy had expected at all.
“I guess it was foolish of me not to think it would be so big,” she says. “Suddenly, I was seeing SAFE rounds get bigger and bigger. Suddenly, it was more than just a bit of money before a Series A round. People were doing an entire round with SAFEs. These rounds could give multiple years of runway. The SAFE round was its own discrete thing.”
As SAFEs grew more popular, feedback streamed in. Take Fred Wilson’s 2017 post on SAFEs, a follow-up to his original blog post criticizing convertible notes. It was not a good idea to push the terms of priced rounds down the line, he wrote. Founders could walk away with far less of their company than they anticipated. Investors would not know what they were signing up for. If founders weren’t careful, SAFEs could build up “like a house of cards” and go into effect all at once. Wilson described it as a “nightmare” and strongly urged that founders do priced rounds from day one.
“If hindsight was 20/20, we would have maybe started with the post-money SAFE to help people understand their ownership more easily," says Nathoo.
“After some time, we decided to look at the SAFE again,” says Levy, and although I don’t ask directly about the criticisms, she nods at me as if she already knows what I’m on about. “We first released it to fit with the behavior around the convertible note, because that was the behavior that was common at the time. Sign a document for the investment now, and decide the terms of the equity later down the line. But people were struggling with their ownership and it was hard to do the math.”
The year was 2018, and Levy’s legal team had grown. Multiple people contributed to the post-money SAFE. While pre-money SAFEs calculated company capitalization without the current SAFE round, making it difficult to understand how much equity investors owned and how much a founder would be diluted, post-money SAFEs calculated capitalization including the current SAFE round, making it easier to understand dilution and how much each investor owned. And if a founder had been diligent about tracking the numbers, they would know at all times — no matter how many SAFEs they raised — exactly how much of their company was theirs.
They took the pre-money SAFEs off the website and the new post-money SAFE became the new norm for YC, starting in 2018.
“If hindsight was 20/20, we would have maybe started with the post-money safe to help people understand their ownership more easily,” says Nathoo. "But at the time people were so used to the terms on the convertible note that it just wouldn’t have worked as well. It’s an iterative process, it’s never over, and it’s always incremental.”
To that end, as of winter 2022, Y Combinator started investing $375K in its startups using uncapped MFN SAFEs, in addition to their standard $125K for 7%. "Uncapped" means that investors have no guarantee of the price they’ll convert at when the next round hits and will settle on the same terms that startups grant to future SAFE investors; MFN (most favored nation) means that YC will take the terms of the lowest subsequent capped SAFE.
One piece of feedback, however, is hard to solve, an existential question that cuts to the heart of the behavior of SAFEs and convertible notes.
If these convertible securities — debt or equity — only turn into shares at certain conversion moments, what happens if a startup never raises venture capital again?
This wasn’t all speculation. Freelancer network Toptal raised a single $1.4M seed round using convertible notes from investors including Andreessen Horowitz. But Toptal never raised another round, so even though it hit nearly $200M in revenue in 2018, investors never received any shares. There had been no liquidation moment. And, by the contracts, it was all fair and square.
Toptal had done what the note didn't anticipate: It had broken the social contracts of Silicon Valley, the type of thing that isn't really something you can write in a clause for. Toptal's story was often contrasted with Notion's, which allegedly chose to raise a small equity round — despite claiming profitability — just to convert its investors' convertible notes into shares.
It seems to be that, after a certain point, the utility and success of the SAFE really is contingent on a founder's worldview — how much effort they put into tracking dilution, how closely they read the document when they sign off on terms, and whether they keep their promises to investors, even when they don't have to.
It's not easy to figure out the exact impact of the SAFE. Most startups do not share these details when they announce their funding rounds. Perhaps most eloquent about the SAFE's impact is Alex Danco, who describes SAFEs as a Schelling Point.
“When a founder and investor shake hands and agree to do a pre-seed round, they are both probably just assuming it will be a SAFE note…If SAFE notes did not exist, the startup and the investors would have to find a deal structure, and hammer out details for convertible debt or a small priced round. That takes communication, which is work; and it takes lawyers, which cost money. But if everyone agrees ahead of time to just meet up at the SAFE note, the cost of getting a deal done goes down, at a pretty critical moment in the startup’s early life.”
Levy says creating new, easy-to-understand documents hasn't been much of a focus for YC, although she tells me that she’s been curious about finding ways to improve mergers/acquisitions and venture debt. Nathoo mentions that she's been interested in making it easier for companies to flip from being LLCs to corporations, and finding ways to help founders and investors in different countries work together.
It's not all up to YC anymore, Levy emphasizes. She cites others in the ecosystem that have followed suit, naming the NVCA, which released a set of financing documents, which include templatized documents for priced rounds, including voting agreements, term sheets, and stock purchase agreements.
“We really did put a lot of thought into the SAFE and talked to as many people as possible," says Levy. "I'm happy with it. If you ask me, in hindsight, I wouldn’t have changed a thing."
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