Pre-money vs post-money SAFE

What it means

A SAFE is an agreement in which an investor pays now and receives shares later, at a price set by a future priced round. The pre-money SAFE was the original 2013 form; the post-money SAFE replaced it in 2018 and is now the more common one. The difference is what the valuation cap is measured against. A post-money SAFE's cap counts every other convertible instrument as already converted, which fixes the investor's percentage at conversion. A pre-money SAFE's cap does not, so its holders dilute one another as more instruments are issued.

Why it matters

The choice decides who absorbs the dilution from every SAFE signed after the first one. Under a post-money SAFE the investor's percentage is locked, so each additional instrument you issue comes out of the founders. Under a pre-money SAFE the earlier holders share the cost with you. Founders routinely sign several SAFEs over a year, treating each as a small and independent decision, and then discover at the priced round that the combined bite is far larger than the sum they had in their head. The instrument is not being unfair; it is doing exactly what it says. It is simply doing it four times.

Worked example

You have 8,000,000 founder shares and raise four post-money SAFEs of EUR 500,000 each, all capped at EUR 10m. Each holder is promised five percent of the post-money company, so together they hold twenty percent and that twenty percent is fixed no matter what else happens. The founders drop to eighty percent before the priced round has even been negotiated. Run the same four instruments as pre-money SAFEs and the holders convert against a smaller base and dilute each other, landing at roughly seventeen percent between them, with the founders keeping about three percentage points more. Nothing about the headline terms differed. Only the form did.

The common mistake

Comparing two offers on the cap alone. A EUR 12m post-money cap and a EUR 12m pre-money cap are not the same deal, and the post-money one is more expensive to the founder in every scenario where more than one instrument exists. The second mistake is stacking post-money SAFEs without keeping a running total. Because each one states a clean percentage, they look additive and harmless, and there is no moment before the priced round at which anything forces you to add them up. A third error is treating the cap as the only number that matters when the round finally arrives, since a SAFE that converts at the round price because the cap never bound has still consumed a slice of the company.

In practice

The document will usually say so in its title, and the Y Combinator forms are labelled explicitly. If it is not obvious, the giveaway is in the definition of Company Capitalization: if the definition includes all convertible securities and the option pool as converted, it is a post-money SAFE. Add the instruments up as you sign them rather than at the round, and model the total before signing the third one, because the third is usually where the number stops matching intuition.

What to ask

Ask which form the document is, in those words, before you discuss the cap. Then ask what other convertible instruments are already outstanding and what they convert into, because under a post-money SAFE every one of them dilutes you rather than the new investor, and the answer changes what the cap you are being offered is actually worth. If you have already signed one or two, ask your lawyer to total the promised percentages across all of them and tell you the founder position at conversion, assuming no priced round improves it. The number is usually larger than founders expect, and it is far better to learn it before signing the third instrument than at the round, when it is fixed and nothing can be done about it. Keep a running total of every instrument as you sign it, in one place, so the number is never a surprise at the round.

Related terms

• SAFE vs convertible note Both defer the price to a later round. Only one of them is a debt that can fall due.
• Advance subscription agreement (UK) The UK instrument for money paid now against shares issued later, built to stay eligible for SEIS and EIS relief.
• Option pool shuffle Placing the option pool before the money, so the founders fund all of it and the incoming investor funds none.