SAFEs: Equity or Debt? Include or Exclude from Cap Table?

Early-stage SaaS founders often turn to SAFEs (Simple Agreements for Future Equity) to raise seed funding quickly and efficiently. They’re simple, fast, and avoid the complexity of negotiating a full equity round.

But when it comes to accounting, valuation, and ownership reporting, many founders get tripped up by one key question:

Is a SAFE considered equity, debt, or something else entirely — and how does it affect your cap table?

Let’s break it down.

What Is a SAFE?

A SAFE (Simple Agreement for Future Equity) is a financing instrument introduced by Y Combinator in 2013. It allows investors to provide capital today in exchange for the right to receive equity later, usually when the company raises its next priced-round.

Unlike traditional convertible notes, SAFEs:

Do not accrue interest;

Have no maturity date; and

Are not debt obligations of the company.

In essence, a SAFE is a contractual right — investors give you cash now, and in return, they’ll receive shares when a specific trigger event occurs (e.g., Series A financing or liquidity event).

So, Is It Equity or Debt?

From a legal and accounting standpoint, SAFEs are neither traditional debt nor current equity — they sit somewhere in between.

Not Debt

No repayment obligation exists if the company fails or delays a priced round;

No interest expense is recorded; and

SAFEs generally don’t appear as liabilities unless they contain redemption or repayment features (which most standard SAFEs do not).

Not Equity (Yet)

Investors do not own stock at the time of the SAFE issuance;

They have no voting rights or dividend rights; and

The SAFE converts into equity only upon a qualified financing or exit event.

From an accounting perspective, standard SAFEs are often treated as equity-classified instruments under ASC 480 and ASC 815 — meaning they’re recorded in the equity section of the balance sheet (not as liabilities), though no shares are issued until conversion.

HCPA Perspective: SAFEs are typically classified as equity instruments, but they do not increase outstanding share counts until they convert.

How SAFEs Affect the Cap Table

This is where founders often get confused.

Before a SAFE converts, investors don’t yet hold shares, but they do represent future dilution to the existing shareholders.

Here’s how to think about it:

Before Conversion

SAFEs are off-cap table, meaning the holders are not yet shareholders;

However, investors and accountants often include them in “fully diluted ownership” scenarios when modeling valuations or preparing investor decks; and

You can track them in a separate SAFE ledger or “shadow cap table” to anticipate post-conversion ownership percentages.

At Conversion

SAFEs convert into preferred shares (usually at a discount or valuation cap);

The conversion event adds new shareholders and officially dilutes existing ownership; and

The company must update its cap table, issue new shares, and reflect the conversion in its equity accounts.

SAFE Conversion in Practice

Suppose your SaaS startup raises $500,000 through a SAFE with:

A $5 million valuation cap, and

A 20% discount.

Later, you raise a Series A round at a $10 million pre-money valuation.

The SAFE investor converts using the better of the two terms (cap or discount):

Valuation cap method: $500,000 / $5M cap = 10% ownership

Discount method: $10M × 80% = $8M effective valuation → $500K / $8M = 6.25% ownership

Thus, the SAFE investor would receive shares representing 10% ownership on conversion — impacting your post-money cap table at that moment.

Accounting and Tax Implications

From an accounting standpoint:

Cash received from SAFEs is generally recorded in the equity section of the balance sheet, though some SAFEs may be classified as mezzanine equity or liabilities depending on their term;

Upon conversion, the SAFE amount moves into paid-in capital, and the new shares are issued; and

No income tax event occurs upon SAFE issuance or conversion, but the resulting equity ownership affects future option grant pricing under 409A valuations.

If the SAFE contains nonstandard clauses — such as repayment rights, interest, or investor redemption — classification may shift toward liability accounting.

Investor and Reporting Considerations

Investors, boards, and auditors often request transparency around SAFEs for valuation and forecasting purposes. Best practices include:

Maintaining a SAFE ledger that tracks investors, amounts, valuation caps, and conversion terms;

Including SAFEs in your fully diluted cap table modeling, even before conversion; and

Updating your 409A valuation once SAFEs convert, since your equity structure has changed materially.

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About Herod CPA PLLC

Herod CPA PLLC helps venture-backed founders navigate the accounting and tax complexities of seed fundraising—from SAFE structuring and cap table modeling to 409A valuations and investor-ready financials.

Raising on SAFEs and need to ensure your books are investor-ready? We can help.