Pre vs. Post Money Valuation Cap SAFEs

Looking to raise money with a SAFE? First question to answer is what SAFE to use.

In this post, I will break down one of the main differences between the Pre and Post Money SAFEs.

Who gets diluted?

Pre-Money SAFEs are often considered to be company-friendly, while Post-Money SAFEs are considered investor-friendly. Why is that?

It all relates to how the Company’s Capitalization is calculated, which determines who will be diluted and by how much upon conversion of the SAFE.

To figure out how many shares an investor will receive upon conversion of their SAFE, you will need to determine the price per share of the stock received upon conversion.

How do we get the price per share? It is calculated by dividing the valuation cap by the “Company’s Capitalization”, which is a defined term in both the Pre and Post-Money SAFE. But, the definition is different between the two, which makes all the difference.

A Pre-Money SAFE’s Company Capitalization is based on a moment in time before the SAFE investment (i.e., pre-money). Meaning, the Company Capitalization will include all the company’s shares issued and outstanding, assuming conversion of all outstanding options, warrants and other convertible securities and Common Stock available for issuance under the company’s stock plan, but will EXCLUDE outstanding SAFEs and convertible promissory notes.

Everything after “EXCLUDE” is where the real difference lies between the two.

On the other hand, a Post-Money SAFE includes SAFEs and convertible promissory notes, along with the other securities included in the calculation for a Pre-Money SAFE.

So, for a Pre-Money SAFE the ultimate conversion price per share does not consider the outstanding SAFEs or convertible promissory notes that will be converting in the “Equity Financing”, meaning that upon conversion those investor’s ownership will be diluted by the other SAFEs or convertible promissory notes that are converted.

Alternatively, a Post-Money SAFE will include those amounts and will protect the SAFE or convertible promissory note investors from further dilution by the other SAFEs or convertible promissory notes converting in the Equity Financing.

This simple difference between what is included when determining the Company’s Capitalization can help shift the burden of dilution between parties. Regardless of Pre or Post money SAFE the existing shareholders will be diluted but with a Pre-Money SAFE that dilution will also be shared by the investors.

Please be aware that SAFEs come in other flavors which will impact the analysis, such as including a discount or if the SAFEs are uncapped. I am saving those discussions for a later date.

Note, SAFEs are a product of YCombinator and the form Post-Money SAFEs can be found on their website. Y Combinator no longer provides the form Pre-Money SAFE on their website but they are still used and I wanted to highlight differences as they are likely to be encountered while fundraising. Please reach out with any questions.