Instrument
The pre-money SAFE
The original 2013 SAFE. Its cap is a pre-money valuation, and the ownership it buys depends on how much else is raised and on the next round's option pool.
Y Combinator introduced the SAFE in late 2013 as a simpler replacement for convertible notes. That original version, now called the pre-money SAFE, was replaced as YC's standard in 2018 by the post-money SAFE. Pre-money SAFEs are still around: many companies issued them before 2018, some investors and non-U.S. variants still use the structure, and YC's guide notes that a company with many pre-money SAFEs outstanding may simply keep using them. If you hold or are offered one, you need to know how it converts.
The one difference that matters
Both versions convert at the lower of a cap price and (optionally) a discounted round price. What differs is the share count the cap is divided by, the capitalization. YC's user guide lays it out:
| Counted in the capitalization | Pre-money SAFE | Post-money SAFE |
|---|---|---|
| Issued shares | Yes | Yes |
| Granted and promised options | Yes | Yes |
| Unissued option pool | Yes | Yes |
| Option pool increase in the priced round | Yes | No |
| SAFEs, notes and other converting securities | No | Yes |
Two consequences follow:
- Pre-money SAFEs dilute each other. Because other SAFEs are not in the denominator, every additional SAFE adds shares alongside yours and reduces your percentage. With post-money SAFEs, each holder's percentage is fixed and only the founders and option holders are diluted by more SAFE money.
- The pre-money SAFE is protected from the next round's pool increase. The new pool is in its denominator, which lowers its conversion price; the founders absorb the whole increase. The post-money SAFE shares that dilution.
The upshot, in YC's words, is that under the original SAFE the answer to "how much of the company are we selling?" depended on how much was raised on other SAFEs and on an option-pool negotiation that might be years away.
Worked example: same company, two kinds of SAFE
Take the company used across this site: 10,000,000 fully diluted shares (founders 9,000,000, options granted 400,000, pool 600,000). It raises $1 million on a SAFE, then a Series A of $6 million at $24 million pre-money with a 10% post-round option pool.
A $9 million pre-money cap and a $10 million post-money cap sound like the same deal ($9 million plus the $1 million raised). They are not:
| Post-money SAFE, $10M cap | Pre-money SAFE, $9M cap | |
|---|---|---|
| Conversion shares | 1,111,111 | 1,212,856 |
| Conversion price | $0.9000 | $0.8245 |
| SAFE after the Series A | 7.40% | 8.00% |
| Founders after the Series A | 59.94% | 59.36% |
The pre-money SAFE converts at $9,000,000 ÷ (10,000,000 + 916,123 pool increase) = $0.8245, because the Series A's pool increase sits in its denominator. The investor ends with more and the founders with less.
Add a second SAFE
Now suppose the company raises a second $1 million SAFE on identical terms before the Series A.
| Two post-money SAFEs | Two pre-money SAFEs | |
|---|---|---|
| Each SAFE after the Series A | 7.35% | 7.27% |
| First SAFE: change from one-SAFE case | -0.05 points | -0.73 points |
| Founders after the Series A | 52.94% | 53.09% |
The first pre-money SAFE holder lost 0.73 percentage points because of a SAFE signed after theirs; the first post-money holder lost only 0.05 points, the small extra dilution from a larger Series A pool. Before the Series A, each post-money SAFE holder's stake is exactly amount ÷ cap; each pre-money holder's stake depends on everything else raised.
Which is better for whom
Neither is better in the abstract: price is a negotiation, and a pre-money cap can always be set lower to match a post-money one. The difference is predictability. With post-money SAFEs a founder can tell exactly what each SAFE costs as it is signed, and an investor knows the stake it bought. With pre-money SAFEs, a founder who keeps raising on SAFEs can be surprised at the priced round by how much the stack of SAFEs, and the pool increase, cost them. YC's guide gives an example where an investor's $500,000 on a $4.5 million pre-money cap could end up anywhere from well above to well below 10% depending on other SAFEs.
Mixing pre-money and post-money SAFEs
It is possible to have both outstanding; YC's guide works through an example (its Example 2) and our engine reproduces its figures (see validation). The pre-money SAFE's conversion price is fixed first, from its cap and the pre-round capitalization including the pool increase. The post-money SAFEs then take their percentage of a capitalization that includes the pre-money SAFE's shares. The arithmetic works, but founders end up maintaining two definitions on one cap table. YC suggests three options for companies with original SAFEs outstanding: amend and restate them into post-money SAFEs with the holders' agreement (and board approval), mix the two and model carefully, or keep using the pre-money form if there are many.
Other differences between the versions
- Pro rata. The original SAFE had a pro rata right in the round after the one in which it converted (usually the Series B), which many people misread as applying to the Series A. The post-money SAFE drops it in favor of an optional side letter for the converting round.
- Sale of the company. The original SAFE gave the holder a choice between cash (its money back) or conversion; the post-money SAFE pays the greater of the two automatically and confirms the SAFE ranks alongside preferred stock.
- Dividends and amendments. The post-money SAFE adds a right to share in dividends paid on common stock and allows amendment by a majority-in-interest of SAFEs with the same terms.
Sources
- Post-Money Safe User Guide, Y Combinator. Cited for facts; not reproduced.