YC post-money SAFEs: Avoiding expensive dilution mistakes

If you’re a startup founder looking for funding, the terms of your SAFEs (Simple Agreements for Future Equity) can have a big impact on how much equity you’re giving away.

But a lot of founders don’t fully understand the difference between YC post-money SAFEs and pre-money SAFEs – particularly when it comes to founder dilution.

It’s important to get clear on how each type of SAFE works so you don’t unintentionally give away more equity than you expect.

In this video, SeedLegals CEO and Co-Founder, Anthony Rose breaks down how each type of SAFE works, how it impacts dilution, and what this means for the equity in your company.

Key takeaways

Pre-money SAFEs vs. post-money SAFEs

Pre-money SAFEs are calculated based on the valuation before new SAFEs (or other convertible debt) are added. For example, if an investor contributes $1 million with a $9 million pre-money valuation, the investor will own 10% of the company post-conversion ($1 million out of $10 million).

Post-money SAFEs, however, guarantee investors a fixed ownership percentage calculated after their investment but before other SAFEs or funding events are factored in. For example, in the same scenario with a $10 million post-money valuation cap, the investor still gets 10%, but subsequent SAFEs further dilute the founder and other stakeholders.

The dilution dilemma with multiple post-money SAFEs

If you’ve got more than one pre-money SAFE, investors dilute each other, which means that the founder’s equity dilution is shared among them.

But if you’ve got more than one post-money SAFE, each investor is guaranteed their fixed ownership percentage as if no other SAFEs exist. That’s why the dilution impact is worse for the founder.

Say we have three investors: Alice, Bob, and Charles. They each invest $1 million on a $10 million post-money valuation cap. With post-money SAFEs, each investor receives exactly 10% of the company, so the founder is diluted 30%.

Now, let’s compare this to pre-money SAFEs. In this case, the dilution is shared because each new investor dilutes the founder and the other SAFE investors. Let’s say the same three investors invest $1 million each, using pre-money SAFEs, at a $9 million pre-money valuation.

The total amount raised is $3 million, which is added to the $9 million pre-money valuation, creating a $12 million post-money valuation.

Assuming all the SAFEs convert at the same time, Alice’s investment of $1 million at a $12 million post-money valuation gives her an 8.33% ownership stake ($1 million ÷ $12 million).

Bob’s $1 million investment also leaves him with an ownership stake of 8.33% ($1 million ÷ $12 million).

And Charles’ investment of $1 million gives him an 8.33% stake ($1 million ÷ $12 million).

By the end of this process, the total dilution is spread between the founders and other SAFE holders. The founder ends up giving away 25% equity instead of the full 30% under the post-money SAFEs.

Post-money SAFEs promise non-diluting equity (which is unusual)

Post-money SAFEs guarantee an investor their specific ownership, regardless of time taken for the funding round or other SAFEs raised during that time.

For example, if you raise $1 million on a $10 million post-money valuation cap with a post-money SAFE, the investor is guaranteed 10% ownership in the company whenever the SAFE converts. That 10% figure doesn’t change even if you raise additional SAFEs during the same round.

This is different from how equity typically works in regular funding rounds, where each investor’s stake dilutes proportionally as new stock is issued.

While post-money SAFEs are good for investors, as it gives them certainty on their stockholding, they can end up overly diluting founders.

When post-money SAFEs work well (and when they don’t)

YC post-money SAFEs aren’t always to be avoided. They can be useful for high valuation caps with limited investment amounts, which minimizes their impact on dilution.

But if you have lower valuation caps, combined with larger raises, post-money SAFEs can lead to founders being heavily diluted. It’s especially problematic in early-stage funding rounds when the valuation cap naturally tends to be smaller.