87% of pre-seed rounds now use SAFEs, yet most founders miscalculate their dilution. This guide explains SAFE mechanics in plain English with real math examples. By the end, you'll understand exactly how SAFEs convert and what you'll own after your Series A.
SAFE Agreement: The 60-Second Explanation
| What SAFE Is | What SAFE Isn't |
|---|---|
| A promise to give equity later | Equity today |
| Triggered by next priced round | Debt (no interest, no maturity) |
| Converts at discount or cap | A loan you must repay |
| Immediate money, delayed paperwork | A fixed ownership percentage |
In one sentence: An investor gives you money now, and gets shares later at a discount when you raise your Series A.
The Two Key Terms: Cap and Discount
Valuation Cap
Definition: The maximum valuation at which the SAFE converts, regardless of actual Series A price.
Example: - SAFE: $500,000 investment with $8M cap - Series A: $20M pre-money valuation - SAFE investor gets: Shares priced at $8M (not $20M) - Result: 2.5x more shares than Series A investors per dollar
Why it exists: Rewards early risk. The earlier you invest, the lower the cap, the more shares you get.
Discount
Definition: A percentage discount off the Series A price.
Example: - SAFE: $500,000 investment with 20% discount - Series A: $2.00 per share - SAFE investor pays: $1.60 per share (20% off) - Result: 25% more shares than Series A investors
When SAFEs Have Both
Rule: Investor gets whichever is better for them (lower conversion price = more shares).
SAFE terms: $500K on $8M cap with 20% discount Series A: $12M pre-money valuation Option 1 (Cap): $500K ÷ ($8M ÷ 10M shares) = 625,000 shares Option 2 (Discount): $500K ÷ ($12M × 80% ÷ 10M shares) = 520,833 shares Cap is better → SAFE converts at cap → 625,000 shares
Pre-Money vs Post-Money SAFEs
| Type | How Dilution Works | Better For |
|---|---|---|
| Pre-money SAFE | Your dilution depends on all SAFEs raised | Founders (usually less dilution) |
| Post-money SAFE | Investor's % is fixed at signing | Investors (guaranteed ownership) |
Post-Money SAFE Example
Post-money SAFE: $500K on $5M post-money cap Investor ownership at conversion: $500K ÷ $5M = 10% This 10% is FIXED, regardless of: - How many more SAFEs you raise - What option pool you create - Who else invests before Series A More SAFEs = More founder dilution (not investor dilution)
Warning: Multiple post-money SAFEs can create unexpected founder dilution. Model carefully.
Cap Table Example: Before and After SAFE
Starting Point (Before Any Investment)
Founder A: 5,000,000 shares (50%) Founder B: 5,000,000 shares (50%) ---------------------------- Total: 10,000,000 shares (100%)
After SAFE Investment
SAFE: $500,000 on $8M cap (hasn't converted yet) Cap table TODAY (before conversion): Founder A: 5,000,000 shares (50%) Founder B: 5,000,000 shares (50%) SAFE holder: $500K conversion right (not shares yet) ---------------------------- Total shares: 10,000,000 Total SAFE rights: $500,000
After Series A Conversion
Series A: $3M raised at $12M pre-money ($15M post-money) Step 1: SAFE converts at $8M cap - SAFE shares: $500K ÷ ($8M ÷ 10M shares) = 625,000 shares Step 2: Series A investors get their shares - Series A shares: $3M ÷ ($15M ÷ 10.625M post-SAFE shares) - Series A shares: ~2,125,000 shares Final cap table: Founder A: 5,000,000 shares (39.2%) Founder B: 5,000,000 shares (39.2%) SAFE holder: 625,000 shares (4.9%) Series A: 2,125,000 shares (16.7%) ---------------------------- Total: 12,750,000 shares (100%)
Founders went from 100% to 78.4%—that's 21.6% dilution from one SAFE + one Series A.
Common SAFE Scenarios Calculated
Scenario 1: Single SAFE, Low Valuation Series A
SAFE: $500K on $6M cap, 20% discount Series A: $8M pre-money Cap conversion: $500K at $6M = 8.33% ownership Discount conversion: $500K at $6.4M (80% of $8M) = 7.81% Cap wins → SAFE gets 8.33%
Scenario 2: Multiple SAFEs at Different Caps
SAFE 1: $300K on $5M cap (early investor) SAFE 2: $400K on $8M cap (later investor) SAFE 3: $300K on $10M cap (even later) Series A: $15M pre-money SAFE 1 converts at $5M: 6.0% ownership SAFE 2 converts at $8M: 5.0% ownership SAFE 3 converts at $10M: 3.0% ownership Total SAFE dilution: 14% before Series A shares issued
Scenario 3: Post-Money SAFE Stack (Danger Zone)
Post-money SAFE 1: $500K on $5M cap = 10% fixed Post-money SAFE 2: $500K on $5M cap = 10% fixed Post-money SAFE 3: $500K on $5M cap = 10% fixed Total SAFE ownership: 30% FIXED Founder ownership after SAFEs convert: 70% (before Series A) Series A: $2M at $10M pre-money (20%) Founder ownership after Series A: 56% Raised $3.5M total, founders own 56%.
This is why post-money SAFE stacking is dangerous.
SAFE Terms Comparison
| Stage | Typical Cap Range | Typical Discount | SAFE Type |
|---|---|---|---|
| Pre-seed (idea stage) | $2M-$6M | 20% | Post-money common |
| Pre-seed (some traction) | $5M-$10M | 20% | Either |
| Seed (product-market fit) | $8M-$15M | 15-20% | Pre-money preferred |
| Bridge (between rounds) | Discount only | 20-25% | Either |
Explaining SAFEs to Co-Founders and Employees
For Co-Founders
"We're raising $500K on a SAFE with an $8M cap. What this means: - We get $500K now - Investor gets shares at our Series A - Their shares are priced at $8M max (even if Series A is higher) - Expected dilution: ~6-8% depending on Series A valuation We're not giving up equity today—we're promising it at a discount when we raise our next round."
For Employees Asking About Dilution
"Your 0.5% will likely become ~0.35-0.4% after our Series A. Here's the math: - Our SAFE investors will get ~8% when they convert - Series A investors will get ~20% - Everyone gets diluted proportionally But here's what matters: 0.4% of a $50M company is worth more than 0.5% of a $10M company. Dilution is normal and healthy when it comes with value growth."
Red Flags in SAFE Terms
| Red Flag | Why It's Bad | What's Normal |
|---|---|---|
| Cap under $3M | Excessive dilution for founders | $4M+ for pre-seed |
| 30%+ discount | Unusually aggressive | 20% standard |
| MFN + pro-rata + other rights | Stacking investor-favorable terms | Pick 1-2, not all |
| Cap AND discount both very favorable | Double-dipping | One or the other dominant |
| No cap (discount only) for large amounts | Unbounded dilution risk if you raise high | Always have cap for $250K+ |
Frequently Asked Questions
When does a SAFE actually convert to shares?
At your next "equity financing"—typically a priced Series A round. The SAFE defines what counts as a qualifying round (usually raising above a threshold like $1M). Until that happens, SAFE holders don't have shares—just conversion rights.
What if I never raise a Series A?
SAFEs typically also convert on acquisition or IPO. If acquired, SAFE holders usually get the greater of: (1) their money back, or (2) conversion at the cap. If you shut down, SAFE investors usually get paid back before founders (but after creditors).
Do SAFE investors have voting rights?
No—not until conversion. SAFE holders aren't shareholders until the SAFE converts. They don't vote on company decisions or show up on your cap table as shareholders. They have conversion rights, not equity.
How many SAFEs is too many?
More than 3-4 SAFEs before a priced round is a yellow flag. Multiple SAFEs create cap table complexity and signal to Series A investors that you couldn't close a priced round. Plan to convert SAFEs within 12-18 months.
Should I use the Y Combinator SAFE or a custom one?
Use the standard YC SAFE unless you have a specific reason. The YC SAFE is industry standard, investors recognize it, and lawyers don't need to review novel terms. Custom SAFEs add legal costs and negotiation friction.
Can I negotiate SAFE terms?
Yes—cap and discount are negotiable. Your leverage depends on traction and alternatives. Hot companies negotiate higher caps. Investors with high conviction may accept less favorable terms. Everything is negotiable, but know market rates.
Use this guide to understand and model your SAFE dilution accurately. For faster cap table modeling, try River's startup finance tools to calculate conversion scenarios.