Post-money SAFEs: caps, discounts and dilution

What a SAFE is and is not

The simple agreement for future equity was created at Y Combinator in 2013, and YC standardized on the post-money SAFE in 2018. YC publishes three US versions: valuation cap with no discount, discount with no cap, and an uncapped MFN version with neither. Pro rata rights, the right but not the obligation to invest in a future priced round, are in an optional side letter rather than the SAFE itself.

The SEC's investor education office has warned that SAFEs are not common stock and do not give a current equity stake or voting rights. They convert only if a trigger in the agreement occurs, such as an equity financing or a sale, and there may be scenarios where they never convert. A SAFE is still a security, so the offering needs a securities law exemption.

Cap versus discount

A valuation cap sets the maximum valuation at which the SAFE converts. YC explains that on a post-money valuation cap SAFE, the ownership sold equals the investment divided by the post-money valuation cap. A discount converts at a percentage below the price paid by new investors in the priced round, so the exact ownership is only known at that round.

Example: A company issues a $500,000 SAFE at a $10,000,000 post-money cap, which converts into 5 percent of the company, and then a $1,000,000 SAFE at the same cap, which converts into 10 percent. Together the SAFE holders will own about 15 percent before the priced round's new money. Because each SAFE's percentage is fixed, the second SAFE dilutes the founders and option pool, not the first SAFE holder.

Keep a running model

SAFEs signed months apart, at different caps, are easy to lose track of. Keep a pro forma cap table that shows each SAFE's conversion, the option pool, and the effect of a priced round at a few plausible valuations. Check whether the priced round's terms will require the option pool to be increased before the new money comes in, which further dilutes existing holders.

Read each SAFE as signed rather than relying on the template name. Side letters, MFN clauses and changes to the definitions of company capitalization can change the outcome. Record board approval for each issuance, and make the securities filings that the financing requires.

Your next steps

1. Model every outstanding SAFE in a pro forma cap table before signing another.
2. Confirm the version, cap, discount and any side letter for each SAFE as signed.
3. Treat each SAFE as a securities offering and make the required filings.