That\u2019s until it\u2019s time to convert your SAFEs into shares \u2013 then things can get messy.\u00a0<\/span><\/p>\n You might be stuck asking:<\/span><\/p>\n In this article, we\u2019ll cover how SAFE conversions work, and how the math is different for pre-money and post-money SAFEs.<\/span><\/p>\n A SAFE (Simple Agreement for Future Equity) is a way for investors to put money into your company in exchange for the right to receive shares in a future funding round.\u00a0<\/span><\/p>\n Founders like SAFEs since they\u2019re straightforward \u2013 you don\u2019t need to decide a valuation up front \u2013 which makes them faster and easier than other ways of fundraising (like convertible notes or a typical equity funding round).<\/span><\/p>\n But a SAFE is an agreement for <\/span>future<\/span><\/i> equity, so it doesn’t give the investor any shares right away. It\u2019s not equity until it \u201cconverts\u201d \u2013 usually when you raise your next priced equity round. And the number of shares a SAFE converts into is based on a conversion price, calculated using either a \u201cvaluation cap\u201d, or a \u201cdiscount\u201d (we\u2019ll cover what those mean in the next section).<\/span><\/p>\n <\/p>\n SAFE investors usually take on more risk by backing your company early. So, to reward that risk, they typically get better terms than the new investors who come in during your next priced round.\u00a0<\/span><\/p>\n The two main ways to give them that better deal are \u201cvaluation caps\u201d and \u201cdiscounts\u201d.\u00a0<\/span><\/p>\n The <\/span>valuation cap<\/b> sets a maximum company valuation for calculating the SAFE investor\u2019s price per share \u2013 so if your company raises at a valuation above the cap, the SAFE converts at the lower, capped valuation. That means the SAFE investor gets more shares for the same money. They get a better price than the new investors in the round, because they invested earlier and took more risk.<\/span><\/p>\n For example, say a SAFE investor puts in $100,000 with a $2 million valuation cap, and your Series A is priced at a $4 million valuation. Because the cap is lower than the round valuation, the SAFE investor converts on more favourable terms than the new investors in that round \u2013 they get a lower effective price per share, which usually means more shares for the same investment.\u00a0<\/span><\/p>\n The <\/span>discount<\/b> works differently. Instead of setting a maximum valuation, it gives the investor a percentage off the price per share in the round \u2013 usually between 10% and 25%. So if new investors are paying $1.00 per share, a 20% discount would let the SAFE investor convert at $0.80 per share.<\/span><\/p>\n"},{"acf_fc_layout":"content_highlight","highlight_type":"tip","background_colour":"blue","show_icon":true,"content":"What if a SAFE includes a valuation cap and a discount?<\/b> The difference between a pre-money and a post-money SAFE comes down to <\/span>when<\/span><\/i> the investor\u2019s ownership is calculated \u2013 and it can make a big difference to how much of the company they end up owning.<\/span><\/p>\n Post-money SAFEs are now the standard option (they\u2019re what Y Combinator uses).<\/span><\/p>\n With a post-money SAFE, the investor’s ownership percentage is easier to predict upfront. That’s because the valuation already factors in all the other SAFEs that will convert alongside it. That makes it easier to see what percentage the investor will own <\/span>after<\/span><\/i> all SAFEs convert but <\/span>before<\/span><\/i> the new priced round comes in.<\/span><\/p>\n For example, if an investor puts in $1 million on a $10 million post-money valuation cap, they’re guaranteed 10% ownership (it could actually be even more than 10% if the next funding round is at a valuation lower than $10 million).\u00a0 If you raise more SAFEs afterwards, that additional dilution falls on the founders and existing shareholders \u2013 not on the post-money SAFE investor, whose percentage is fixed.<\/span><\/p>\n Two things founders should watch out for, though. First, that 10% is the investor’s ownership before the priced round closes \u2013 once the new investment comes in, everyone gets diluted, so their actual percentage will be lower. Second, don’t set the post-money cap at what your company is worth today \u2013 it should reflect what you think it’ll be worth at the point the SAFE converts. If you set it too low, you’ll be giving away a bigger slice of the company than you intended.<\/span><\/p>\n"},{"acf_fc_layout":"cta","cta":{"type":"default","subheading":"","heading":"Learn about YC SAFEs and dilution","content":"Want to understand how post-money SAFEs can lead to more dilution than you expect?","bullet_points":false,"form":{"type":"none","hubspot_form":{"layout":"newsletter","hide_founderinvestor_toggle":false,"default_community":"founder","custom_form_id":"","gdpr_disclaimer":"By subscribing, you agree to receive information from SeedLegals. You can unsubscribe anytime. View our privacy policy<\/a>"},"custom":{"embed":""},"gtm_form_type":"default","gtm_form_location":"default"},"button":{"title":"Check out the guide","url":"https:\/\/seedlegals.com\/us\/resources\/yc-post-money-safes-avoiding-expensive-dilution-mistakes\/","target":"_blank"},"image":414259}},{"acf_fc_layout":"text","text":" With a pre-money SAFE, the investor\u2019s shares are calculated based on your company\u2019s valuation before any new funding comes in \u2013 this calculation <\/span>doesn\u2019t<\/span><\/i> include the shares created for other converting SAFEs or notes (but <\/span>does<\/span><\/i> include any increase in the option pool being made as part of the funding round).<\/span><\/p>\n That means the SAFE investor\u2019s (and the funding round investor\u2019s) ownership percentage isn\u2019t fixed. Each additional SAFE you\u2019ve raised increases the total number of shares in the calculation and dilutes every other SAFE investor \u2013 and they dilute each other in return.<\/span><\/p>\n For example, if an investor puts in $1 million on a $9 million pre-money valuation, you might estimate they\u2019ll end up with around 10% ownership ($1 million out of $10 million). But that only holds if they\u2019re the only SAFE converting and there\u2019s no new investment in the round. In reality, if you\u2019ve raised multiple SAFEs on different terms, the final percentage will be lower because each conversion adds more shares to the pool.<\/span><\/p>\n So, with pre-money SAFEs, the final dilution isn\u2019t preset at the time the SAFE is signed \u2013 it depends on the total amount raised \u2013 because every new SAFE dilutes all the other SAFE-holders and shareholders, including the founders.<\/span><\/p>\n When post-money SAFEs convert, calculating the number of shares to be issued is trickier than you might expect. That’s because the shares each SAFE investor receives feed into the company’s total share count \u2013 but you need that total to work out each investor’s allocation in the first place. It’s a circular calculation, and it usually needs to be solved step by step.<\/span><\/p>\n For example, if one investor converts using their discounted price per share, that increases the total shares, which can change whether the next investor should use the discount or the cap. You often have to work through each investor\u2019s conversion in sequence to get the right result.<\/span><\/p>\n It\u2019s possible to do the math yourself, but it\u2019s easy to get wrong.<\/span><\/p>\n That\u2019s why we\u2019ve built a SAFE calculator to help you get a clear, realistic estimate of how your SAFEs are likely to convert.\u00a0<\/span><\/p>\n And when it\u2019s time to do the final, legally accurate conversion, the full SeedLegals platform runs the complete calculation for you automatically.<\/span><\/p>\n The math for <\/span>pre-money SAFEs<\/b> is fairly straightforward, because each investor converts independently. You don\u2019t need to model the whole cap table in one go \u2013 you only need three things:<\/span><\/p>\n For each pre-money SAFE, you calculate two prices to give you the \u201cconversion PPS\u201d:<\/span><\/p>\n Then the SAFE converts using whichever of those two prices is lower, because that gives the investor more shares for their money.<\/span><\/p>\n The formula is simple:<\/span><\/p>\n SAFE shares = Investment amount \/ Conversion PPS<\/strong><\/p>\n Because pre-money SAFEs all convert before any of the new investment comes in \u2013 and without referencing each other \u2013 you\u2019ll need to repeat the same process for every investor.<\/span><\/p>\n Pre-money SAFEs convert first \u2013 their conversions increase the total number of shares.\u00a0<\/span><\/p>\n Afterwards, the post-money SAFEs convert using that updated share count. That total determines how many shares a post-money SAFE investor must receive to hit their fixed ownership percentage.<\/span><\/p>\n"},{"heading":"Do SAFE investors dilute each other?","post_content":false,"text":" Pre-money SAFEs<\/b> do dilute other SAFE-holders. Every new pre-money SAFE increases the total number of shares, which dilutes all the earlier SAFEs because none of them have a fixed ownership percentage.<\/span><\/p>\n But <\/span>post-money SAFEs<\/b> don\u2019t. Since post-money SAFEs give the investor a fixed percentage upfront, adding more SAFEs afterwards doesn\u2019t dilute them \u2013 it dilutes the founders and existing shareholders instead.<\/span><\/p>\n"},{"heading":"Does the option pool dilute SAFE investors?","post_content":false,"text":" For <\/span>pre-money SAFEs<\/b>, it would. If you increase your option pool as part of the round, those extra shares sit in the cap table before the SAFEs convert, which means both founders and pre-money SAFE investors share the dilution.<\/span><\/p>\n But for <\/span>post-money SAFEs<\/b>, any new or increased option pool created as part of the priced round is typically excluded from the post-money SAFE conversion calculation. So that dilution usually falls on the founders and existing shareholders instead.<\/span><\/p>\n"},{"heading":"Can a SAFE convert without a priced round?","post_content":false,"text":" It depends on the wording of the SAFE agreement. The main trigger is a priced equity round, but most SAFEs also cover a liquidity event (like an acquisition or IPO). Also, if the company dissolves, the SAFE investor typically gets a cash repayment of their investment amount rather than shares.<\/span><\/p>\n"},{"heading":"What happens if multiple investors have identical cap and discount terms?","post_content":false,"text":" If their terms are identical, they convert on the same PPS.\u00a0<\/span><\/p>\n That means neither influences the other\u2019s outcome, and they receive shares proportionately based on their investment amounts.<\/span><\/p>\n"}]},{"acf_fc_layout":"text","text":" If you\u2019ve raised using SAFEs, SeedLegals helps you convert them cleanly when your priced round closes.\u00a0<\/span><\/p>\n And if you\u2019re planning to raise with SAFEs again, we\u2019ll help you create, send and sign them in minutes.<\/span><\/p>\n Book a call below, or <\/span>start your 7-day free trial today<\/span><\/a>.<\/span><\/p>\n"},{"acf_fc_layout":"form","layout":"custom","heading":"Get answers fast, for free","content":"Bring all your questions - we\u2019ve got the answers!\r\nWe\u2019ll match you with the right specialist.","custom":{"image":false,"button_text":"Get Started","form":{"type":"hubspot","hubspot_form":{"layout":"default","hide_founderinvestor_toggle":false,"default_community":"founder","custom_form_id":"21723609-6f1b-45c0-9691-77d462dc3bed","gdpr_disclaimer":"By subscribing, you agree to receive information from SeedLegals. You can unsubscribe anytime. View our privacy policy<\/a>"},"custom":{"embed":""},"gtm_form_type":"default","gtm_form_location":"default"}},"add_shadow":true}],"blog_layout":"v2","v2":{"hero":{"image_background_color":"#E7F1FF","image_fit":"img--cover"},"adverts":[{"type":"selector","selected_advert":{"ID":413526,"post_author":"68","post_date":"2024-11-27 15:13:44","post_date_gmt":"2024-11-27 15:13:44","post_content":"","post_title":"US - Newsletter signup (Form)","post_excerpt":"","post_status":"publish","comment_status":"closed","ping_status":"closed","post_password":"","post_name":"us-newsletter-signup-form","to_ping":"","pinged":"","post_modified":"2024-11-27 15:20:01","post_modified_gmt":"2024-11-27 15:20:01","post_content_filtered":"","post_parent":0,"guid":"https:\/\/seedlegals.com\/?post_type=blog_advert&p=413526","menu_order":0,"post_type":"blog_advert","post_mime_type":"","comment_count":"0","filter":"raw"},"custom_advert":{"advert_tracking_id":"","layout":"default","image":{"image":false,"link":""},"text":{"heading":"","content":"","button":null,"background_color":"#EEF4FF","text_color":"#000646"},"form":{"form":{"type":"none","hubspot_form":{"layout":"newsletter","hide_founderinvestor_toggle":false,"default_community":"founder","custom_form_id":"","gdpr_disclaimer":"By subscribing, you agree to receive information from SeedLegals. You can unsubscribe anytime. View our privacy policy<\/a>"},"custom":{"embed":""},"gtm_form_type":false,"gtm_form_location":false}},"cta_and_testimonials":{"heading":"","button":null,"bullet_points":false,"testimonials":false}}}],"related_sidebar_posts":false},"show_author_card":false,"revision_date":"","hero_image":430822,"has_custom_post_authors":true,"is_expert_reviewed":true,"has_sources":false,"related_posts":false,"custom_post_authors":{"authors":[{"author":{"ID":169,"user_firstname":"Idin","user_lastname":"Sabahipour","nickname":"Idin Sabahipour","user_nicename":"idin-sabahipour","display_name":"Idin Sabahipour","user_email":"idin@seedlegals.com","user_url":"","user_registered":"2024-08-29 09:55:07","user_description":"","user_avatar":"\n
What is a SAFE and when does it convert into shares?<\/b><\/h2>\n
What\u2019s the difference between a valuation cap and a discount?<\/b><\/h2>\n
\r\n
\r\nIf a SAFE has both a cap and a discount, the investor doesn\u2019t get to combine them.
\r\nInstead, they get the one that gives them the better outcome. So, at conversion, you'll compare both options, and the one that gives them the lower price per share (i.e. more shares) is what will be used.
\r\n","link":null},{"acf_fc_layout":"text","text":"How do pre-money and post-money SAFEs work differently?<\/b><\/h2>\n
Post-money SAFEs<\/h3>\n
Pre-money SAFEs<\/strong><\/h3>\n
How do you calculate share conversions for a post-money SAFE?<\/b><\/h2>\n
How do you calculate share conversions for a pre-money SAFE?<\/b><\/h2>\n
\n
\n
FAQs<\/b><\/h2>\n"},{"acf_fc_layout":"additional_post_content","sections":[{"heading":"What\u2019s the conversion order if I have both pre-money and post-money SAFEs?","post_content":false,"text":"
Sort your SAFEs (and get ready for your next round)<\/b><\/h2>\n
Meet our experts<\/a> and learn more about our review process and quality assurance in our editorial policy<\/a>."}},"yoast_head":"\n