Post-money SAFE conversion worked share by share: the cap price, the discount price, which one wins, and the pre-money at which they swap.
A SAFE converts at the lower of two prices: the valuation cap divided by the company's capitalisation, and the round price less the discount. An illustrative 1.0 million post-money SAFE with a 10.0 million cap and a 20 per cent discount, on 10.0 million pre-round shares, converts at 0.90 a share into 1,111,111 shares in a Series A priced at 2.16. That is 8.0 per cent of the company after the round, worth 2.40 million at the round price.
Worked in full in The Venture Capital Associate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Many seed rounds are raised on SAFEs, and many associates meet the conversion arithmetic for the first time when a Series A term sheet arrives and the cap table has to be rebuilt. The mechanics are short but there is a circularity in them, and the post-money cap behaves differently from the pre-money version that older models still assume.
| Input | Value |
|---|---|
| Founders' shares | 9,000,000 |
| Option pool, issued and unissued | 1,000,000 |
| Fully diluted shares before the SAFE converts | 10,000,000 |
| SAFE investment | 1,000,000 |
| Post-money valuation cap | 10,000,000 |
| Discount to the round price | 20% |
| Series A pre-money valuation | 24,000,000 |
| Series A new money | 6,000,000 |
Post-money SAFE ownership = investment ÷ post-money cap, of the capitalisation including the SAFE shares
So SAFE shares S solve S = 10% × (10,000,000 + S), which gives S = 10,000,000 × 0.10 ÷ 0.90 = 1,111,111. In Excel: =FD*(Inv/Cap)/(1-Inv/Cap). The cap price is 10,000,000 ÷ 11,111,111 = 0.90.
The Series A pre-money of 24.0 million is normally stated on a fully diluted basis that includes the converting SAFE. If the SAFE converts at the cap, the pre-money shares are 11,111,111 and the Series A price is 24,000,000 ÷ 11,111,111 = 2.16. The discount price is 80 per cent of that, 1.73. The cap price of 0.90 is lower, so the cap wins and the SAFE takes 1,111,111 shares.
The circularity. Under the discount, the SAFE's shares depend on the round price, and the round price depends on how many shares the SAFE takes. Solve it directly: S = investment × FD ÷ (0.80 × pre-money − investment). Here that gives 549,451 shares, half the cap result, which confirms the cap is the better deal for the investor.
| Holder | Shares | Ownership |
|---|---|---|
| Founders | 9,000,000 | 64.8% |
| Option pool | 1,000,000 | 7.2% |
| SAFE holder, converted at 0.90 | 1,111,111 | 8.0% |
| Series A investor, 6,000,000 at 2.16 | 2,777,778 | 20.0% |
| Total, at 2.16 a share = 30,000,000 | 13,888,889 | 100% |
The SAFE investor owned 10.0 per cent of the company just before the round and is diluted to 8.0 per cent by the new money, like everyone else. At the round price its shares are worth 2,400,000: 2.40x on the 1,000,000 invested, before any exit.
| Pre-money | Wins | SAFE shares | Conversion price | Round price | Ownership after | Value multiple |
|---|---|---|---|---|---|---|
| 8,000,000 | Discount | 1,851,852 | 0.54 | 0.67 | 8.9% | 1.25x |
| 12,000,000 | Discount | 1,162,791 | 0.86 | 1.08 | 6.9% | 1.25x |
| 16,000,000 | Cap | 1,111,111 | 0.90 | 1.44 | 7.3% | 1.60x |
| 24,000,000 | Cap | 1,111,111 | 0.90 | 2.16 | 8.0% | 2.40x |
| 40,000,000 | Cap | 1,111,111 | 0.90 | 3.60 | 8.7% | 4.00x |
The two terms swap at a pre-money of 12.5 million, where 80 per cent of the round price equals the 0.90 cap price. Below it the discount guarantees the investor 1.25x on paper, whatever the price; above it the cap gives the investor every unit of value the round adds. Above the crossover the ownership column moves for a different reason: at a higher pre-money the 6.0 million buys a smaller share of the company, so everyone, the SAFE included, is diluted less.
Under the older pre-money SAFE the 10.0 million cap is divided by the 10,000,000 shares before conversion, a price of 1.00 and 1,000,000 shares: 7.3 per cent after the round, with founders at 65.5 per cent. The post-money version gives the investor 8.0 per cent and leaves founders at 64.8 per cent. The 0.7-point gap looks small with one SAFE. It compounds with several: a 1.0 million SAFE at a 10.0 million cap and a 0.5 million SAFE at an 8.0 million cap together take 16.25 per cent before the Series A arrives, and founders start the round at 75.4 per cent.
Compute the cap price on the capitalisation including the SAFE, compute the discount price by solving the circularity, and take the lower: here 0.90 against 1.73, giving 1,111,111 shares and 8.0 per cent after a 24.0 million pre-money round. The free workbooks for this book carry ownership from seed to exit through the reserve arithmetic, and the option pool shuffle linked above is the other term that moves the effective price of the same round.
At whichever gives the investor more shares, which means the lower conversion price. With a 10.0 million post-money cap and a 20 per cent discount on 10.0 million pre-round shares, the cap price is 0.90. The discount price is 80 per cent of the round price, so the discount wins only when the round price is below 1.125, a pre-money below 12.5 million in this example.
A pre-money cap is divided by the shares before the SAFEs convert; a post-money cap is divided by the capitalisation including them, so the investor's percentage is fixed. In the illustrative case the pre-money version converts at 1.00 into 1,000,000 shares, 7.3 per cent after the round; the post-money version gives 1,111,111 shares, 8.0 per cent, and founders hold 64.8 per cent instead of 65.5.
Each post-money SAFE fixes its own percentage of the pre-round company, and they add up. A 1.0 million SAFE at a 10.0 million cap and 0.5 million at an 8.0 million cap together take 16.25 per cent before the Series A, leaving founders with 75.4 per cent of the company before any new money comes in.
This article is one calculation from The Venture Capital Associate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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