SAFEs & Convertible Notes
High-resolution fundraising allows you to raise money constantly. It also obscures exactly how much of your company you've sold.
The Problem with "Not Debt, Not Equity"
A SAFE (Simple Agreement for Future Equity) defers the pricing of a company until a future equity round. Because shares are not issued immediately, founders often stack multiple SAFEs without realizing they have sold 40% of their company before Series A even begins.
Pre-Money vs Post-Money SAFEs
In 2018, Y Combinator updated their standard SAFE from a Pre-Money to a Post-Money model. This was a massive shift in economics favoring investors.
- Pre-Money SAFE: The SAFE investors convert alongside the Series A investors. The dilution of the SAFE converting is shared between the founders and the SAFE investors themselves.
- Post-Money SAFE: The SAFE valuation cap is locked in post-money of the SAFE round, but pre-money of the Series A. The SAFE investor's percentage is fixed. 100% of the dilution caused by subsequent SAFEs or notes falls entirely on the founders.
The Valuation Cap vs Discount
SAFEs usually convert at the lower of the Valuation Cap or the Discount.
- Cap: $10M cap. Series A is priced at $20M. SAFE converts at the $10M price (buying shares for 50% off).
- Discount: 20% discount. Series A is priced at $8M. SAFE ignores the $10M cap and converts at a $6.4M effective valuation.