SAFE (Simple Agreement for Future Equity) is an innovative structure that enables startups to raise capital quickly. This guide provides a detailed, chronological and structural walkthrough of the major SAFE types (Cap, Discount, Cap+Discount, MFN), their practical contractual implementations, and legal issues specific to Korea. It is a comprehensive reference covering contract design and risk management at a glance.

1. What Is a SAFE Investment? How Does It Work for Startups?

SAFE is an investment mechanism designed to enable startups to raise funds quickly and simply. The investor does not receive shares immediately upon investment; instead, they obtain the right to convert their investment into equity when a subsequent funding round (such as Series A) occurs.

The biggest advantage of this approach is that it relieves the burden of early-stage valuation while enabling rapid fundraising without complex negotiations.

"SAFE is a structure designed to raise funds quickly while deferring the burden of valuation, and it is simple and fast because complex contract negotiations are unnecessary."

When a subsequent round occurs, the company's valuation is determined at that point, and the investor receives new shares calculated as their investment amount / the valuation at the follow-on round. For example, if the company is valued at 100 billion won at Series A and the SAFE investor invested 1 billion won, their ownership would be 1%.

There is a difference between how follow-on investors and SAFE investors acquire shares:

• Follow-on investors: Investment → Capital contribution → New share acquisition
• SAFE investors: Convert their already-invested amount into new shares through equity conversion

Beyond simple calculations, additional conditions like Valuation Cap and Discount may be applied to give investors more favorable equity terms.

2. Major SAFE Types and Actual Contract Mechanics

SAFEs can be designed in various forms depending on the investor's and company's circumstances and negotiation structure. Below are the main types and their characteristics.

a) Valuation Cap Only

Under this structure, when calculating the SAFE investor's conversion equity, the valuation is capped at a certain amount regardless of how high the follow-on round's valuation goes. This means the investor's stake is protected from dilution and guaranteed.

"If the cap is 8 billion won but the Series A valuation is 12 billion won, the SAFE investor receives shares based on the 8 billion won valuation."

• Example contract language:

  The conversion price shall be the lower of (i) the Series A issue price and (ii) Cap / Fully Diluted Capital.

This structure is predictable and is the most commonly preferred in practice.

b) Discount Only

Under this structure, the SAFE investor converts at a lower price (with discount applied) than follow-on investors. While this doesn't provide as much protection as a Cap if the company grows dramatically, it guarantees entry at a reliably discounted price.

"If the discount rate is 20% and the Series A issue price is 1,000 won, the SAFE investor receives shares at 800 won."

• Example contract language:

  The conversion price shall be the follow-on round issue price x (1 - Discount Rate).

Recently, Cap Only or Cap+Discount structures have become more preferred.

c) Cap + Discount (Cap and Discount Applied Together)

This structure applies both advantages simultaneously, providing very strong investor protection, but from the founder's perspective, it can relatively weaken their negotiating position. In practice, Cap Only tends to prevail.

"For example, with a Cap of 8 billion won and a 20% Discount SAFE, the lower conversion price (e.g., 700 won or 800 won) is applied depending on the Series A valuation."

• Example contract language:

  The conversion price shall be the lower of (i) the Series A issue price x (1 - Discount Rate) and (ii) Cap / Fully Diluted Capital.

d) MFN (Most Favored Nation)

Without Cap or Discount conditions, if better terms appear later, the same benefits are guaranteed. This is commonly used in early-stage small investments or situations where speed and simplicity are paramount.

"If an early SAFE investor signed an MFN SAFE and a later SAFE with an 8 billion won cap is issued, the MFN investor also receives the 8 billion won cap terms."

• Example contract language:

  If a future SAFE with more favorable terms is issued, the same terms shall apply.

When should you choose which structure?

If valuation is somewhat estimable → Cap Only If uncertainty is high (deep tech, hardware, etc.) → Discount Only To guarantee strongly favorable terms for investors → Cap + Discount (requires negotiating power) If flexibility and simplicity are priorities → MFN

Y Combinator's official documents are also available for reference: https://www.ycombinator.com/documents

3. Key Checkpoints When Executing a SAFE Agreement

SAFE agreements may look simple but actually require careful attention to legal requirements and practical details. Especially after Korea's 2020 Venture Investment Act revision, standards for SAFEs within the regulatory framework became clearer.

Key Checkpoints

(1) Obtaining Unanimous Shareholder Consent

SAFE agreements require the consent of the company and all shareholders.

"This agreement shall take effect subject to the consent of the company and all shareholders."

(2) Notification Obligation

The fact that a SAFE has been executed must be notified in writing to counterparties of any contract that changes the company's capital structure. Failure to comply may result in the SAFE not being legally recognized as a SAFE, so this clause must be included.

(3) Pro-rata Rights and Additional Rights

Basic SAFE agreements generally do not include pro-rata (follow-on participation rights), information rights, or voting rights. For important investors, these rights may be granted through a separate side letter.

4. Legal Limitations and Potential Risks of SAFEs

While SAFEs are widely used, they are not a perfect system.

• Not externally verifiable: No official records like registration remain, earning SAFEs the nickname "submarine investments"
• Contractual rights: Rights are based on the contract rather than the Commercial Act (the investor cannot directly request new share subscription as a shareholder; they can only claim damages for contract breach)
• No conversion if no follow-on investment occurs: Without a follow-on round, there is no equity conversion, meaning the company could receive the investment but never convert it

"SAFE investments are sometimes called 'submarine investments.'"

5. Conclusion

SAFE agreements may appear simple but actually require complex design and careful legal checkpoints. Conversion terms, detailed provisions, shareholder consent, notifications, side letters, and various other aspects must be carefully addressed for both the startup and the investor to execute a successful, risk-free agreement. If you have further questions about SAFEs, it is always advisable to seek expert guidance.