SAFEs and convertible notes: the dilution you cannot see on your cap table

A SAFE — Simple Agreement for Future Equity — is money now, shares later, at terms agreed now. A convertible note is the same idea with interest and a maturity date bolted on.

They exist because agreeing a valuation is slow, and both sides would rather ship the money and settle the price at the next priced round. The cost of that convenience is dilution you cannot see on your cap table until the day it lands.

The two terms that matter

The valuation cap. A ceiling on the valuation at which the SAFE converts. Raise later at a higher price and the SAFE holder still converts as if the company were worth the cap.

The discount. A percentage off the price of the round the SAFE converts into. 20% discount, $1.00 round price, SAFE converts at $0.80.

Where a SAFE has both, the investor gets whichever is better for them. Not both.

Post-money cap: the investor’s percentage is fixed

Since Y Combinator’s 2018 revision, the standard SAFE uses a post-money cap, and the arithmetic is deliberately simple:

ownership = investment ÷ post-money valuation cap

A $500,000 SAFE at a $10,000,000 post-money cap is 5%. Not approximately 5% — 5%, fully diluted, on conversion.

That certainty for the investor has a precise cost for you: later SAFEs do not dilute earlier post-money SAFEs. Every additional SAFE comes out of the founders.

Two SAFEs, worked

Your company from part 2 with 10,100,000 shares held by founders and an advisor, and two SAFEs outstanding:

SAFE	Amount	Post-money cap	Locked ownership
Seed SAFE 1	$500,000	$10,000,000	5.000%
Seed SAFE 2	$250,000	$8,000,000	3.125%
Total	$750,000		8.125%

The SAFE holders own 8.125% between them, so the existing 10,100,000 shares must represent the other 91.875%:

10,100,000 ÷ 0.91875 = 10,993,197 shares after conversion
SAFE 1: 5.000%       =    549,660 shares
SAFE 2: 3.125%       =    343,537 shares
existing holders     = 10,100,000 shares (91.875%)

Founder A’s 6,000,000 shares went from 59.41% of the pre-SAFE count to 54.58% — and not a single share was issued until conversion day.

Pre-money cap: everyone dilutes together

The older pre-money SAFE sets a conversion price instead of a percentage:

conversion price = pre-money cap ÷ company capitalisation (excluding SAFEs)
                 = $10,000,000 ÷ 10,100,000 = $0.990099 per share
shares issued    = $500,000 ÷ $0.990099     = 505,000 shares
ownership        = 505,000 ÷ 10,605,000     = 4.76%

Slightly less than the 5% a post-money SAFE would give — and crucially, if you then issue a second pre-money SAFE, that first investor gets diluted too. Under post-money terms they do not.

That is the whole difference, and it is why post-money became standard: it is better for investors, and simpler to explain.

The mistake that shows up at Series A

Post-money percentages add up, and they add up against you:

Raised on post-money SAFEs	Investor share	Founders keep
$500k @ $10M cap	5.0%	95.0%
+ $250k @ $8M cap	8.125%	91.875%
+ $1M @ $12M cap	16.458%	83.542%
+ $500k @ $15M cap	19.791%	80.209%

Four SAFEs, $2.25M raised, and nearly 20% of the company is committed before a priced round has happened — with the Series A investor’s 20% and a pool top-up still to come out of what remains.

Nothing here is a trick. The terms did exactly what they said. But no cap table showed this until conversion, which is why the only defence is to model it before signing each one.

Convertible notes: the same, plus two complications

Interest accrues and converts too. $500,000 at 6% for 18 months converts roughly $545,000 of principal-plus-interest, so your dilution is slightly larger than the cheque.

Maturity. A note is debt with a due date. If no qualifying round happens before maturity, the holder can in principle demand repayment. In practice it is renegotiated — but it is leverage sitting in someone else’s hands at the worst possible moment.

SAFEs have neither, which is why they dominate early rounds.

Three rules

1. Model every SAFE before you sign it. Not the cap — the resulting percentage, stacked with the ones you already have.
2. Track them on the cap table as a separate section, with amount, cap, discount and type. They are not shares, but they are committed ownership.
3. Remember the pool sits on top. Your Series A investor will want a pool created pre-money (part 3) after the SAFEs convert. Those two effects compound.

Next

Part 7 runs the full sequence — seed, Series A, Series B — and shows what founder ownership actually looks like at the end of it.