Scenario payoffs from the SAFE's own terms, a discount rate calibrated to the price paid, and the remark when a term sheet arrives.
A SAFE held by a fund is fair valued as the probability-weighted payoff of the events that can end it, a priced round, a sale or a dissolution, discounted at a rate calibrated so that the model returns the price paid at inception. An illustrative 1,000,000 post-money SAFE with a 10,000,000 cap calibrates to a 27.75 per cent rate; nine months later, with a term sheet signed at a 30.0m pre-money, it is worth 2,462,048, not its 1,000,000 cost and not the 3,000,000 it would be worth on conversion.
Worked in full in The Private Markets Valuation Specialist by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Many venture funds carry SAFEs at cost until they convert, on the argument that nothing has been priced. That argument fails twice. A SAFE's payoff depends on events with very different outcomes, so its value moves as soon as the probabilities move. And under investment company accounting the instrument is measured at fair value at every reporting date, which means a market participant's price, not the cheque. The approach below is the one a valuation specialist would document: scenario payoffs from the SAFE's own terms, a discount rate taken from the entry price, and a remark when new evidence arrives.
| Term | Value |
|---|---|
| Purchase amount | 1,000,000 |
| Post-money valuation cap | 10,000,000 |
| Discount to the round price | 20% |
| Ownership at the cap | 10% |
At a priced round the SAFE converts at the lower of the cap price and the discounted round price, so it receives preferred shares worth the purchase amount times the larger of (pre-money / cap) and 1 / (1 − discount), that is 1.25. The cap is the better term above a pre-money of 12,500,000. In a sale before any round it receives the greater of its purchase amount and its as-converted share. In a dissolution, whatever is left; 5 per cent is assumed here. The mechanics of conversion are in how a SAFE converts with a cap and a discount.
| Scenario | Probability | Payoff | Multiple | Weighted |
|---|---|---|---|---|
| Priced round at 20.0m pre-money | 50% | 2,000,000 | 2.00 | 1,000,000 |
| Down round at 8.0m pre-money | 15% | 1,250,000 | 1.25 | 187,500 |
| Sale of the company at 15.0m | 5% | 1,500,000 | 1.50 | 75,000 |
| Dissolution | 30% | 50,000 | 0.05 | 15,000 |
| Expected payoff | 100% | 1.2775 | 1,277,500 |
Fair value = Σ probability × payoff / (1 + r)t
Calibration: solve r so that fair value at inception = price paid. Here 1,277,500 / (1 + r) = 1,000,000, so r = 27.75 per cent.
In Excel: =SUMPRODUCT(Prob,Payoff)/Price-1 for a one-year horizon, or Goal Seek for anything else.
The rate is not a cost of capital looked up in a table. It is what the arm's-length price says about how a buyer weighed these scenarios, and it carries forward to the next mark. Picking a generic venture rate instead, say 40 per cent, would value the SAFE at 912,500 on the day it was bought for 1,000,000: a day-one loss the market never priced. The same discipline for equity marks is in how to calibrate a valuation to the entry price.
Nine months later the company signs a term sheet for a Series A at a 30.0m pre-money, expected to close within a quarter. The scenarios change; the calibrated rate stays. All three branches are resolved at the expected close date for simplicity.
| Scenario | Probability | Payoff | Weighted |
|---|---|---|---|
| Series A closes at 30.0m pre-money | 85% | 3,000,000 | 2,550,000 |
| Term sheet fails, later down round at 8.0m | 5% | 1,250,000 | 62,500 |
| Term sheet fails, dissolution | 10% | 50,000 | 5,000 |
| Expected payoff | 100% | 2,617,500 |
Discounted at 27.75 per cent for a quarter (factor 0.9406), the fair value is 2,462,048, 2.46 times cost, and the fund books an unrealised gain of 1,462,048. Carrying the SAFE at cost would understate it by 59.4 per cent of its fair value. Marking it as if converted, at 3,000,000, would overstate it by 21.8 per cent, because the round has not closed.
| Probability the Series A closes | Fair value | Multiple of cost |
|---|---|---|
| 70% | 2,102,264 | 2.10 |
| 85% | 2,462,048 | 2.46 |
| 95% | 2,701,903 | 2.70 |
The failed-close probability is split one third down round, two thirds dissolution in each row. The round price matters even more: at 85 per cent closing, a pre-money of 20.0m gives 1,662,529 and 40.0m gives 3,261,567, because above the cap every extra million of pre-money flows straight into the SAFE's conversion value.
Treating the SAFE as a debt-like instrument worth its face until something happens. It has no coupon and no maturity, and its value is driven almost entirely by the next priced round, so it behaves like an option on the company's equity with a floor in a sale. The second mistake runs the other way: marking to the as-converted value of a term sheet that has not closed. A signed term sheet is evidence that raises a probability, not a closing.
The book makes calibration the backbone of a defensible mark; the free workbooks for the book run calibration and the roll-forward for an equity position with every input editable.
Only as long as cost remains a reasonable estimate of fair value, typically shortly after purchase with no new evidence. Once a priced round is in sight it rarely is: in the illustrative case a term sheet at a 30.0m pre-money takes a 1,000,000 SAFE to 2,462,048, so cost would understate it by 59.4 per cent.
The rate implied by the purchase price. If the scenarios at inception have an expected payoff of 1,277,500 in one year and the SAFE cost 1,000,000, the calibrated rate is 27.75 per cent. A generic 40 per cent would mark it at 912,500 on day one, a loss the market never priced.
Not until the round closes. A signed term sheet raises the probability of conversion but does not guarantee it. With 85 per cent closing probability, the illustrative SAFE is worth 2,462,048; marking it at the 3,000,000 as-converted value would overstate it by 21.8 per cent.
This article is one calculation from The Private Markets Valuation Specialist. 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.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: private equity and private markets → · All 1340 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.