How SAFEs Convert: A Look Under the Hood

A Simple Agreement for Future Equity (SAFE) is a financial contract used by founders to raise capital. SAFEs were introduced by Y Combinator in 2013, and have since become a popular choice for raising early-stage financing.

A SAFE is not equity in the company. Rather, it is a type of convertible instrument that gives the investor the right to receive equity once a triggering event occurs. One common triggering event is a priced equity round, which is when the company sells equity in exchange for money at an agreed price. This means that an investor holding a SAFE does not yet own any equity in the company, unlike if the same investor had participated in a priced equity round instead.

Nevertheless, founders and investors may choose to use a SAFE over a priced equity round or other financial instruments for a number of reasons:

  1. Simpler and cheaper – Compared to a priced round, a SAFE is more streamlined given it has fewer terms to negotiate. This often means less paperwork, which translates to savings in both time and legal costs.
  2. More flexible – Although standard SAFE templates exist, a SAFE can be customized to meet the needs of both founders and investors (e.g. carving out an employee stock option pool). Moreover, SAFEs allow companies to raise funds on a rolling basis, such as by raising consecutive SAFEs at higher valuations. In contrast, priced equity rounds require any new fundraising process to start from scratch.
  3. Valuation not necessary – Unlike a priced equity round, a SAFE does not require an explicit valuation. This is particularly beneficial for early-stage companies whose valuations may be tricky to determine. In lieu of this, a SAFE may contain a valuation cap or discount instead, which specifies how the investment will convert to equity (more on this later).
  4. Not a debt instrument – It is worth noting that while a SAFE is similar to a convertible note (another type of convertible instrument), a SAFE is not a debt instrument. Therefore, a SAFE does not accrue interest and has no maturity date (i.e., it does not have to be repaid).

The rest of this article discusses the key terms commonly found in a SAFE. The article also provides a step-by-step tutorial on how a SAFE converts to equity.

SAFE Key Terms

Y Combinator offers a standard set of SAFEs that vary along a number of key terms.

Valuation Cap

A valuation cap sets a maximum price for how a SAFE investment will convert into equity. For example, suppose a startup has an existing SAFE investor with a $5m valuation cap. Now, assume the startup raises capital through a priced equity round at a $10m valuation. This means that new investors will pay a share price equivalent to the $10m valuation, while the SAFE investor will pay a share price equivalent to the $5m cap instead (i.e. the SAFE conversion price). That is, for the same investment amount, the SAFE holder will get more shares compared to a new investor. 


A SAFE can have a discount that can be used in lieu of – or in addition to – a valuation cap. Similar to the valuation cap, the discount provides investors a favorable conversion price by reducing the equity round’s price per share. Using the same example above, a 20% discount at a $10m valuation means that a SAFE holder will pay a conversion price equivalent to an $8m valuation. Note that if a SAFE has both a valuation cap and a discount, it is often the more favorable provision that is used.

Pro Rata Rights

When a SAFE converts into equity, the conversion actually happens in two steps:

  1. The SAFE converts as per the terms of the SAFE and the equity priced round.
  2. The SAFE gets diluted by the new money coming in from the new investors.

For example, assume a SAFE investor expects to own 10% of a company based on the terms of the SAFE, but before the dilution from the new money. Once the new money comes in, this investor gets diluted to 8%. Pro rata rights allow this investor to add more funds to maintain their ownership stake. This means that the investor can invest more money – at the new valuation – to maintain their expected 10% stake. Note that pro rata rights are often negotiated using side letters.

Most-Favored Nation (MFN)

An MFN provision stipulates that if a subsequent investor gets better terms, previous investors holding MFN status will have their SAFEs amended to include the more favorable terms. For example, assume an existing investor holds a SAFE with a $5m valuation cap. If a future investor receives a $3m valuation cap (lower cap = better), then the existing investor will receive the $3m cap as well.

Pre-Money vs. Post-Money SAFE

One of the most common mistakes early-stage founders make is not distinguishing between pre-money and post-money SAFEs. The major distinction between the two is that the post-money SAFE allows founders and investors to “calculate immediately and precisely how much ownership of the company has been sold.” 

This difference is because a post-money SAFE accounts for all other SAFEs (and convertibles) when calculating its conversion price, while a pre-money SAFE does not. Said another way, the post-money SAFE “sets a fixed ownership percentage” and its conversion is not impacted by other SAFEs. In contrast, how a pre-money SAFE converts depends on the number of other SAFEs and their terms (i.e. it is “pre” SAFE shares), making it difficult to predict the final ownership stake.

For example, assume that a SAFE investor invested $1m in a post-money SAFE at a $5m valuation cap. The post-money SAFE investor can expect to own 20% (= $1m / $5m) before getting diluted by the new money. This is regardless of any other existing SAFEs and their terms. In contrast, a pre-money SAFE offers no such guarantees.

It is worth noting that pre-money SAFEs also include the full option pool in its calculation, including any increase to the pool due the priced equity round. In contrast, post-money SAFEs exclude the increase to the pool, thereby removing another source of uncertainty. 

Step-by-Step Tutorial

The best way to understand the SAFE provisions above is to walk through a step-by-step tutorial.

Example 1: Valuation Cap

Figure 1. Valuation cap example.

Figure 1 outlines the initial setup for the tutorial and illustrates how a valuation cap works:

  • Your startup has an initial capitalization of 10,000,000 shares.
  • You own 5,000,000 shares while other founders own the balance.
  • There are no more shares remaining in the existing option pool.
  • You have two (2) post-money SAFE investors, each with a $2,000,000 investment (“Principal”), a $20,000,000 valuation cap and a 20% discount.
  • Your startup’s pre-money valuation is $40,000,000, and your startup is taking in a new investment of $10,000,000.
  • Your target option pool is 10% following the completion of the priced equity round.

We first determine that the post-money valuation of the company is:

Post-money Valuation = Pre-money Valuation + New Investment = $50,000,000.

This means that the new investors own 20% of the company (= $10,000,000 / $50,000,000).

Then, we calculate the ownership of the SAFE investors. From the information given, we can expect that the SAFE investors should each own 10% of the company, which can be obtained by dividing the principal by the valuation cap (= $2,000,000 / $20,000,000). 

The chart shows that each SAFE investor receives 1,250,000 shares. We can verify that this satisfies the 10% ownership requirement by dividing the 1,250,000 shares by the total capitalization after all the SAFEs convert but before the new money comes in:

10% = 1,250,000 shares / (10,000,000 + 1,250,000 + 1,250,000 shares).

However, both SAFE investors actually end up with only 7% ownership. This is because their SAFEs got diluted by 30% due to the shares issued to the new investors (20%) and the options top-up necessary to establish the post-money option pool (10%).

The SAFE discount does not affect the calculations since the benefit of the post-money valuation cap ($20,000,000 vs. $50,000,000) is far better than what the discount provides (20%). Finally, it is worth noting that the remaining founders own 56% of the company in the end, given that 44% is now owned by the new investors (20%), the option pool (10%) and SAFE holders (14% = 2 x 7%).

Example 2: Discount

Figure 2. Discount example.

Figure 2 illustrates how a discount can alter the calculation. In the example above, the first SAFE holder’s discount is increased to 90%. This steep discount provides the SAFE investor a significantly favorable conversion price by reducing the $1.15 price per share paid in the round:

Conversion Price = $1.15 x (1 - 90%) = $0.115 / share.

This conversion price translates to 17,391,304 shares being issued:

17,391,304 shares = Principal / Conversion Price = $2,000,000 / ($0.115 / share).

Compared to the first example, the first SAFE holder now owns a 40% stake in the company (= 17,391,304 shares / 43,478,260 shares). Note that this increase in 33% ownership is at the expense of the founders. The second SAFE investor, the new investors and option pool all retain their original stakes.

Example 3: Pro Rata Rights

Figure 3. Pro rata rights example.

Figure 3 shows how a SAFE investor owning pro rata rights can maintain their ownership stake once an equity round occurs. In this example, the first SAFE investor is able to buy additional shares to bring their stake back up to 10%. The second SAFE investor, who does not own pro rata rights, remains at 7%.

Note that the additional pro rata shares are paid using the equity round price of $2.80 / share and not the conversion price from either the SAFE’s valuation cap or discount. Moreover, the 3% of pro rata shares are taken from the new investors – which now only own 17% – and are not taken from the founders. 

Example 4: Most-Favored Nation (MFN)

Figure 4. Most-favored nation example.

Figure 4 illustrates the value of holding an MFN provision. Here, the second SAFE holder has a better valuation cap at $15,000,000 compared to the first SAFE holder which remains at $20,000,000. The second SAFE holder is then awarded a higher share of the company, ending up with 9.3% ownership. However, due to the MFN provision, the first SAFE holder also ends up with 9.3%. Their SAFE terms are amended to receive the superior valuation cap that the second SAFE holder received.

Unlike in the pro rata rights example, the new shares awarded to both SAFE holders are taken from the founders. The founders end up with only 51.4% of the company, which is 4.6% less than before (= 2 x 2.3% due to the increase to 9.3% from 7%).

Example 5: Pre-Money vs. Post-Money SAFE

Figure 5. Pre-money SAFE vs post-money SAFE example.

Figure 5 shows what happens if a pre-money SAFE is used instead of a post-money SAFE. In this example, the first SAFE holder now holds a pre-money SAFE instead of a post-money one. As such, the first SAFE holder ends up with only 6.6% of the company. The second SAFE holder, which still holds a post-money SAFE, retains 7%. The 0.4% difference is distributed to the founders.

Note that the conversion price of a pre-money SAFE is determined by taking the pre-money valuation and dividing it by the pre-money capitalization, which also includes the option pool:

Conversion Price = $20,000,000 / (10,000,000 + 1,774,194 shares) = $1.699 / share.

The resulting shares can then be found by dividing the principal by the conversion price:

1,177,419 shares = Principal / Conversion Price = $2,000,000 / ($1.699 / share).


A SAFE is an effective instrument that enables startups to raise capital in a streamlined manner. A SAFE’s simplicity, flexibility and cost gives it advantages over a priced equity round, especially for early-stage startups whose valuation may still be tricky to determine.

Nevertheless, founders need to be aware of the key provisions of any SAFE they enter into (e.g. valuation cap, discount, pre-money vs. post-money SAFE) in order to predict how these instruments would convert into equity. Failing to do so may lead to unforeseen dilution or other surprises.

At Mantle, we are building a next generation platform for modern founders, powered by AI. Use our SAFE calculator in conjunction with many other founder-friendly tools – such as priced round and waterfall modelling, ESOP planning and more – to help you manage your equity.

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