SAFE (Simple Agreement for Future Equity)

A SAFE, short for simple agreement for future equity, is a financing contract introduced by the US accelerator Y Combinator in late 2013 and now common in Canadian pre-seed and seed rounds. The investor pays a purchase amount today. In return, the company promises to issue shares when a defined event happens, most often a priced round in which new investors buy preferred shares at a fixed valuation.

Until then, the investor holds only a contract right. The SAFE ends when it converts or when the investor is paid out on a sale or wind-up of the company.

A SAFE postpones the valuation question until a lead investor sets a price, but the founder agrees today to the formula that later decides how much of the company the investor owns. Our guide to SAFEs and convertible notes in Canada lists what to confirm before signing.

The two published Canadian templates are not interchangeable.

YC Canada SAFE. It states the purchase amount and cap in US dollars, and the parties confirm in the form that they changed nothing except the blanks, so a company raising Canadian dollars should address the currency with counsel. The investor represents that it is an accredited investor, and the company may void the SAFE and return the money if that is not true at the time of the equity financing. The company represents that it is a private issuer under section 73.4 of the Securities Act (Ontario) and NI 45-106. The tax clause addresses US tax only. An optional Canadian pro rata side letter can give the investor a right to buy into the priced round in which the SAFE converts.

NACO Canadian SAFE. One of the term sheets produced for NACO's Common Docs project, it is modelled on the YC SAFE, but its default template includes both a cap and a discount and adds a maturity date, which its authors considered more appropriate for the Canadian market. Read the maturity clause closely: it decides whether that date brings conversion, an extension or repayment.

Under the YC form, nothing obliges the company to repay the investor on a schedule. There is no interest, no maturity date and no default remedy letting the investor demand repayment while the company operates. The investor is paid only in two cases: on a liquidity event such as a sale of the company, where it receives the greater of its purchase amount or its as-converted value, and on a dissolution, where it is entitled to its purchase amount if funds remain.

The YC Canada SAFE makes the investor's claim to its purchase amount junior to the company's debts, including unconverted convertible notes, on par with other SAFEs and preferred shares, and senior to common shares. It is designed to operate like non-participating preferred shares, behind every creditor.

It is not equity either, because no shares exist until conversion. That middle position has practical consequences:

• The investor has no vote and no right to notice of meetings, and receives dividends only as a matching payment if the company pays a dividend on its common shares that is not payable in common shares.
• The company needs a share class to convert into. If its articles do not already authorize preferred shares, the next round will need articles of amendment creating them.

A NACO-style SAFE with a maturity date sits closer to the line. If the investor can demand repayment at maturity, the instrument starts to behave like a convertible note.

A SAFE is a security under the Securities Act (Ontario), whose definition covers any document evidencing an interest in or to a security, so issuing one is a distribution that needs a prospectus exemption under the Act and National Instrument 45-106. Three are common.

• Accredited investor. In Ontario the exemption is in section 73.3 of the Securities Act, and NI 45-106 sets the income, financial asset and net asset tests. An individual who qualifies on the income test, the net asset test or the $1,000,000 financial asset test signs a Form 45-106F9 risk acknowledgement at or before signing the SAFE.
• Private issuer. Section 73.4 of the Securities Act covers a non-reporting company whose securities, other than non-convertible debt, carry transfer restrictions and are beneficially owned by no more than 50 persons, not counting employees and former employees. Buyers must fit listed categories, including directors, officers, founders and their family, close personal friends and close business associates, accredited investors and existing security holders. SAFE holders count toward the 50, because the limit excludes only non-convertible debt.
• Family, friends and business associates. In Ontario this exemption needs a Form 45-106F12 risk acknowledgement signed by the purchaser, an executive officer of the company and, where a relationship is relied on, the director, executive officer, control person or founder concerned.

The company must file a report of exempt distribution on Form 45-106F1 within 10 days when it relies on the accredited investor or the family, friends and business associates exemption. The private issuer exemption is not on NI 45-106's list of exemptions that require the report. Conversion shares are exempt under section 2.42 of NI 45-106 because they are issued under the terms of a security already distributed.

Two terms set the conversion price.

• A valuation cap is the highest company valuation used to price the investor's conversion. If the next round values the company above the cap, the SAFE converts as if the company were worth only the cap.
• A discount gives the investor a set percentage off the price per share that new investors pay in the round.

Where a SAFE has both, the investor converts at whichever gives the lower price, and so more shares. Assume a company has 10,000,000 shares on a fully diluted basis and an investor holds a $250,000 SAFE with a $5,000,000 cap and a 20% discount. Using the simplified method in our SAFE and convertible note modeler:

In a strong round the cap does the work. A cap-only SAFE would convert at $0.50 in both rows; here the discount adds value only when the round is priced below $6,250,000.

Whether the cap is pre-money or post-money changes the share count, especially with several SAFEs outstanding. Pre-money vs. post-money valuation walks through that math, and each SAFE belongs on the company's cap table as soon as it is signed.

Amara Okafor and Ben Hughes run a Mississauga freight-software corporation with 9,000,000 shares on a fully diluted basis, including options. In spring 2025 they raise US$600,000 from three angels on the YC Canada SAFE with a US$6,000,000 post-money valuation cap. Two angels are individuals who qualify as accredited investors on the income test, so each signs a Form 45-106F9 before signing the SAFE. The third invests through a real estate holding company whose latest financial statements show net assets above $5,000,000, so no risk acknowledgement is needed. The company files Form 45-106F1 with the Ontario Securities Commission within 10 days of each closing.

In September 2026 a seed fund leads a US$2,000,000 preferred-share round at a US$10,000,000 pre-money valuation, counted on 10,000,000 shares that include the SAFE conversion shares, so the fund pays US$1.00 a share. The SAFEs convert at US$0.60 (the cap divided by that 10,000,000-share capitalization) into 1,000,000 preferred shares: exactly 10% before the new money, as the post-money cap predicted. After closing, the angels hold 8.3%, the fund 16.7% and the founders and option holders 75%. Because the articles were amended to create the preferred class before closing, the conversion completed on the round's closing date.