SAFEs (Simple Agreements for Future Equity) have become a popular way for early-stage startups to raise capital quickly and efficiently. Created by Y Combinator in 2013, SAFEs allow investors to provide funding today in exchange for the right to receive equity in the future, usually during a priced equity round.

While they’re legally and financially simpler than convertible notes, SAFEs still need to be carefully accounted for on the books. In this post, we’ll break down how to record SAFEs in your accounting system and what to consider from a financial reporting perspective.

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What is a SAFE?

A SAFE is a contract between a startup and an investor that gives the investor the right to receive equity at a later date, typically when the startup raises its next priced round. SAFEs do not accrue interest and don’t have a maturity date, distinguishing them from convertible notes.

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Are SAFEs Debt or Equity?

From a GAAP perspective, SAFEs are not equity when issued—because they don’t represent ownership—and they’re not debt—because they don’t require repayment or interest. Instead, SAFEs are generally considered derivative liabilities or mezzanine financing, depending on the terms and your accounting policy.

But for most early-stage startups using cash-basis or modified accrual accounting, especially before audited financials are required, the SAFE is typically recorded as a liability until conversion.

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Initial Journal Entry When Issuing a SAFE

Here’s a basic example: You raise $250,000 from an investor under a SAFE with a valuation cap.

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Dr. Cash                          $250,000  
    Cr. SAFE Liability                $250,000

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You’re increasing cash (an asset) and recording a SAFE liability to reflect the obligation to issue equity in the future.

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What Happens at Conversion?

Let’s say your startup raises a priced equity round and the SAFE converts into preferred stock. At this point, the SAFE liability is eliminated, and new equity is issued.

Assume the SAFE converts into 100,000 shares of Series A Preferred Stock.

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Dr. SAFE Liability                $250,000  
    Cr. Series A Preferred Stock        $100  
    Cr. Additional Paid-in Capital     $249,900

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You clear the SAFE liability from the books and recognize the equity issued. The par value of the preferred stock is recorded in the stock account (e.g., $0.001 par value x 100,000 shares = $100), and the remainder goes to Additional Paid-in Capital (APIC).

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Common Mistakes to Avoid

• Booking as equity at issuance: SAFEs are not equity until they convert.

• Ignoring SAFEs in your cap table: Even though they’re not technically equity yet, SAFEs will impact ownership.

• Failing to reclassify SAFEs after conversion: Once a SAFE converts, you must remove the liability and record the equity issuance properly.

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Bonus Tip: Using Subaccounts for Tracking

If you issue multiple SAFEs with different terms or investors, use subaccounts under your SAFE liability account to track each one. This will make it easier to calculate conversions and clean up your books during the priced round.