How a SAFE converts, step by step

Your SAFE investor bought 10% of the company. After the Series A, the cap table shows 7.35%. The investor did not lose the difference by error. The Series A diluted the SAFE, as it diluted the founders. This lesson follows the full calculation with the terms of the YC post-money SAFE, one step at a time.

The terms in the SAFE

The YC form defines a few terms with capital letters. You must know four of them to read a conversion.

The Company Capitalization is the share count on which a post-money SAFE calculates its price. It counts all of these items just before the priced round:

• All issued and outstanding shares
• All SAFEs and convertible notes, as the shares into which they convert
• All granted options and all Promised Options
• The unissued option pool from before the round

It does not count the new pool that the priced round adds. There is one exception. If the Promised Options are more than the old unissued pool, the part of the new pool that covers them counts.

The Safe Price is the price that the cap gives. The Discount Price is the price that a discount gives, from the lowest price of the new preferred stock. The conversion rule picks the larger of two share counts:

Safe Price     = Post-money cap ÷ Company Capitalization
Discount Price = Round price × Discount Rate
SAFE shares    = the larger of (Amount ÷ Safe Price) and (Amount ÷ round price or Discount Price)

Why the new pool stays out of the count

The new option pool of a priced round is usually in the pre-money valuation. The lesson on the option pool shuffle tells you why. Thus, someone must pay for the new pool. The post-money SAFE splits the cost of the pool in a specified way:

The YC Post-Money Safe User Guide gives the cause. Options that the company grants between the SAFE and the round do not dilute the SAFE holders. YC writes that the SAFE money pays for those new employees. But the new pool of the round dilutes the SAFE holders. Without this rule, the founders “bear all of the dilution for two rounds of hiring.”

The full calculation

The conversion has six steps. The example uses round numbers.

Before any SAFE, the company has 10,000,000 shares on a fully diluted basis: 9,000,000 for the founders, 400,000 in granted options, and 600,000 in the unissued pool. It signs two post-money SAFEs. SAFE 1 is $500K at a $5M cap, and SAFE 2 is $1M at a $10M cap. Then it raises a Series A: $6M at a $24M pre-money valuation, with an unissued pool of 10% after the round.

Each SAFE owns 10% before the Series A. Make a guess before the steps.

Predict first

Each SAFE owns 10% of the Company Capitalization. The Series A sells 20% and makes a new pool. What part does each SAFE own after the Series A?

Type a guess before you continue. A guess first, even a wrong one, makes the answer easier to remember.

Your guessSave my guess

Worked example · step 1 of 6

Two SAFEs convert into a Series A

1. 1

   Add the SAFE percents

   Each post-money SAFE owns its amount divided by its cap.

   SAFE 1 = $500,000 ÷ $5,000,000    = 10%
   SAFE 2 = $1,000,000 ÷ $10,000,000 = 10%
   Total                             = 20%

Show step 2Show all steps

Step 2 can look strange. The Company Capitalization contains the SAFE shares, but the SAFE shares depend on the Company Capitalization. The division solves that loop. The 10,000,000 old shares are the part that the SAFEs do not own, so they are 80% of the count.

Here is the cap table after the round:

SAFE 1 paid $0.40 a share, and the Series A paid $1.7647. Thus, SAFE 1 got approximately 4.4 times as many shares for each dollar. That is the reward for the first risk.

Do the last steps yourself

The next problems hide the steps from the end. The first problem leaves you only the last step. The last problem is a full conversion. Use the steps above as a model.

Work it out

Same company and same round. The founders hold 9,000,000 shares, and the total after the Series A is 17,000,000. What part of the company do the founders own after the Series A?

Your answerCheck

Work it out

A different company: founders hold 10,000,000 shares and there is no pool. One SAFE: $1M at a $10M post-money cap, so the Company Capitalization is 11,111,111 shares. The Series A is $5M at a $20M pre-money valuation, with no new pool. What is the round price?

Your answerCheck

Work it out

Same company. The Series A buys $5M ÷ $1.80 = 2,777,778 new shares. What part of the company does the SAFE own after the Series A?

Your answerCheck

Work it out

A new company: 8,000,000 founder shares and a 2,000,000-share unissued pool. SAFE A is $400K at a $4M post-money cap, and SAFE B is $1M at a $10M post-money cap. The Series A is $5M at a $15M pre-money valuation, with no new pool. What part of the company does SAFE A own after the Series A?

Your answerCheck

The lab

The lab does the full calculation with your numbers. It opens with the example above. Try these changes, one at a time:

• Lower the Series A pre-money valuation to $8M. SAFE 2 then converts at the round price, because its Safe Price is not lower.
• Set SAFE 1 to “Both” with a 20% discount, and lower the pre-money valuation to $6M. The discount wins, because 80% of the round price is less than the Safe Price.
• Set the pre-money valuation to $10M, the same as the cap of SAFE 2. SAFE 2 still converts at the round price, because the round must also pay for the new pool.
• Set the unissued pool after the round to 0%. The round then adds no pool shares, so the SAFEs and the founders lose less to the round.

Lab

Convert SAFEs into a Series A

Set the cap table, up to four post-money SAFEs, and the Series A terms. The lab shows each step with your numbers.

Before the SAFEs

Founders' shares

Granted options

Unissued pool

Post-money SAFEs

• SAFE 1

  Remove
  Terms

  CapDiscountBothNone
  Amount

  Post-money cap

• SAFE 2

  Remove
  Terms

  CapDiscountBothNone
  Amount

  Post-money cap

Add a SAFE

The Series A

Pre-money valuation

New money

Unissued pool after the round

As a share of the company after the round. The round adds pool shares only to reach this target.

Capitalization

12,500,000

Company Capitalization, in shares

Series A price

$1.7647

New pool shares

1,100,000

Founders after

52.94%

From 90%

How each SAFE converts

SAFE	Safe Price	Converts at	Shares	Before the A	After the A
SAFE 1	$0.40	$0.40 (cap)	1,250,000	10%	7.35%
SAFE 2	$0.80	$0.80 (cap)	1,250,000	10%	7.35%

The calculation with your numbers

1. 1

   Company Capitalization

   Every share, option, and pool share before the round, plus the SAFE shares. The SAFEs that convert at their caps own a fixed part, so divide by what is left.

   10,000,000 ÷ (1 − 20%)
   = 12,500,000

2. 2

   The round price

   The pool increase is in the pre-money, so the price divides the pre-money valuation by the Company Capitalization plus the new pool shares.

   New pool shares = 1,100,000
   $24,000,000 ÷ (12,500,000 + 1,100,000)
   = $1.7647

3. 3

   Each SAFE gets its lowest price

   Safe Price = cap ÷ Company Capitalization. Discount Price = round price × (1 − discount). The SAFE gets the price that buys the most shares.

   SAFE 1: Safe Price $0.40, round $1.7647
     $500,000 ÷ $0.40 = 1,250,000 shares
   SAFE 2: Safe Price $0.80, round $1.7647
     $1,000,000 ÷ $0.80 = 1,250,000 shares

4. 4

   The new money

   The Series A investors buy new shares at the round price.

   $6,000,000 ÷ $1.7647 = 3,400,000 shares
   Total after the round = 17,000,000

Just before the Series A

• Founders
• Granted options
• Option pool
• SAFE 1
• SAFE 2

After the Series A

• Founders
• Granted options
• Option pool
• SAFE 1
• SAFE 2
• Series A investors

The cap table after the Series A

Holder	Security	Shares	Ownership
Founders	Common	9,000,000	52.94%
Granted options	Options	400,000	2.35%
Option pool	Unissued options	1,700,000	10%
SAFE 1	Series A-1 preferred	1,250,000	7.35%
SAFE 2	Series A-2 preferred	1,250,000	7.35%
Series A investors	Series A preferred	3,400,000	20%
Total, fully diluted		17,000,000	100%

The SAFEs own 20% of the Company Capitalization. The new pool and the new money then dilute every earlier holder, so the SAFEs end with 14.71% together, and the founders go from 90% to 52.94%.

SAFE 1 and SAFE 2 pay less than the round price, so the cap table shows Safe Preferred Stock (Series A-1 and Series A-2). Its liquidation preference equals the money paid, not the shares × the round price.

Check your result

A conversion has many steps, and a small error in one step changes all the results after it. Three checks find most errors:

• Each SAFE that converts at its cap owns exactly amount ÷ cap of the Company Capitalization. In the example, 1,250,000 ÷ 12,500,000 = 10%.
• The new investors own exactly new money ÷ post-money valuation. In the example, $6M ÷ $30M = 20%, and 3,400,000 ÷ 17,000,000 = 20%.
• The unissued pool after the round equals the target. In the example, 1,700,000 ÷ 17,000,000 = 10%.

Real cap tables round share counts down to whole shares. YC’s own examples drop the decimals, for example 11,764,705 shares where the math gives 11,764,705.9. Thus, a real result can be different from your result by a few shares or a fraction of a cent.

Safe Preferred Stock

A SAFE that converts at its cap pays less for each share than the new investors. Suppose that the SAFE gets the same preferred shares as the new investors. Then its liquidation preference is much larger than its money. The YC form prevents that result.

A SAFE that converts at its cap gets Safe Preferred Stock, a sub-series of the new preferred stock, for example “Series A-2.” It has the same rights as the new preferred, with one difference. Its liquidation preference for each share is the Safe Price. Thus, the total preference equals the money that the SAFE paid.

In YC’s Example 1, Investor A paid $200,000 and got 588,235 shares at $0.34. The liquidation preference is $200,000. At the Series A price of $1.1144, the same shares have a preference of $655,529, more than three times the money paid. The lesson on liquidation preferences teaches what a preference does in a sale.

Expert note: a round above the cap does not always use the cap

The round must also pay for its new pool. Suppose that all SAFEs convert at their caps. Then a cap has an effect only if the round pre-money valuation is more than cap × (1 + new pool shares ÷ Company Capitalization). In YC’s Example 1, a seed round at an $8.8M pre-money valuation adds a large pool of 1,573,000 shares. The threshold for an $8M cap is $8M × (1 + 1,573,000 ÷ 11,764,705) = $9.07M. Thus, the $8M-cap SAFE converts at the seed price, although $8.8M is more than $8M.

For a full Series A with SAFEs, a pool top-up, and new money, go to the full Series A example.

Quiz · question 1 of 5

Test what you learned

Which item does the Company Capitalization of a post-money SAFE NOT include?

• APromised Options that the company did not grant yet
• BThe new pool of the priced round, except the part that covers Promised Options
• CThe unissued pool from before the round
• DOther SAFEs