SAFEs are popular with startup founders for good reason. They are short, relatively simple, and can often be completed much faster than a priced equity financing. That simplicity is also part of the problem.
Because SAFEs are so easy to use, founders sometimes raise one SAFE round, then another, then another, without fully modeling what those instruments will do to the capitalization table when they eventually convert. The result can be a founder dilution surprise.
This is especially true with post-money SAFEs.
The Key Question: Who Bears the Dilution?
The difference between a pre-money SAFE and a post-money SAFE is not just technical. It changes who bears the dilution from later SAFE financings. Under a traditional pre-money SAFE, later SAFE investors dilute both the founders and the earlier SAFE investors. Under a post-money SAFE, the SAFE investors are generally treated as one protected pool. Each SAFE investor effectively locks in its ownership percentage, and the dilution from later SAFE issuances falls primarily on the founders and existing stockholders.
The reason is a subtle but important difference in the definition of “Company Capitalization.” Under a traditional pre-money SAFE, outstanding SAFEs are generally excluded from the capitalization calculation used to determine conversion. As a result, later SAFE investors dilute not only the founders, but also the earlier SAFE investors. Under a post-money SAFE, however, the capitalization calculation generally includes outstanding SAFEs and other convertible securities, allowing each SAFE investor to effectively lock in its ownership percentage at the time of investment. The result is that dilution from later SAFE issuances falls primarily on the founders and existing stockholders.
That distinction matters a lot.
A Simple Example
Assume the founders own 100% of the company before any SAFE financing.
The company then raises three separate SAFE rounds:
| Round | Investment Amount | Valuation Cap |
| SAFE #1 | $500,000 | $5,000,000 |
| SAFE #2 | $500,000 | $5,000,000 |
| SAFE #3 | $500,000 | $5,000,000 |
The company has raised $1.5 million in total before its first priced round.
For purposes of this example, assume that the priced round is completed at a valuation above the $5,000,000 valuation cap, so that the valuation cap determines the conversion price for each SAFE. Also assume there is no discount, no interest, no option pool increase and no other convertible securities.
Now compare the outcomes.
Pre-Money SAFE: Later SAFE Investors Dilute Earlier SAFE Investors
Under a pre-money SAFE, each $500,000 SAFE converts at a price based on the company’s capitalization before giving effect to the SAFE conversions. Assume the founders hold 5,000,000 shares before conversion. With a $5,000,000 valuation cap, each SAFE converts at $1.00 per share, so each SAFE investor receives 500,000 shares.
After SAFE #1:
| Holder | Ownership |
| Founders | 90.91% |
| SAFE #1 | 9.09% |
After SAFE #2:
| Holder | Ownership |
| Founders | 83.33% |
| SAFE #1 | 8.33% |
| SAFE #2 | 8.33% |
After SAFE #3:
| Holder | Ownership |
| Founders | 76.92% |
| SAFE #1 | 7.69% |
| SAFE #2 | 7.69% |
| SAFE #3 | 7.69% |
Notice what happened.
SAFE #1 initially represented 9.09% of the company. After SAFE #2, it dropped to 8.33%. After SAFE #3, it dropped again to 7.69%. In other words, later SAFE investors diluted both the founders and the earlier SAFE investors. Founder dilution is still meaningful, but it is not borne by the founders alone.
Post-Money SAFE: SAFE Investors Are Protected as a Pool
The post-money SAFE works differently. Each $500,000 investment on a $5,000,000 post-money valuation cap effectively represents 10% of the company. After all three SAFEs are issued, the ownership result is approximately:
| Holder | Ownership |
| Founders | 70.00% |
| SAFE #1 | 10.00% |
| SAFE #2 | 10.00% |
| SAFE #3 | 10.00% |
SAFE #1 does not fall from 10% to 8.33% to 7.69%.
SAFE #2 does not get diluted by SAFE #3.
Instead, all SAFE investors are effectively preserved, and the incremental dilution falls on the founders and existing stockholders.
Same Dollars Raised, Different Founder Dilution
Using the same facts:
| Structure | Founder Ownership After 3 SAFEs | Founder Dilution |
| Pre-Money SAFE | 76.92% | 23.08% |
| Post-Money SAFE | 70.00% | 30.00% |
That is a meaningful difference.
The company raised the same $1.5 million. The valuation cap was the same. The number of SAFE rounds was the same.
But the founders gave up significantly more ownership under the post-money SAFE.
Importantly, the effect does not disappear when the company eventually completes a priced financing. The Series Seed or Series A investors will dilute everyone proportionately. The critical difference is that, by the time that financing occurs, the founders own 70% of the company under the post-money SAFE example, versus 76.92% under the pre-money SAFE example. The priced round magnifies the consequences of the earlier dilution—it does not eliminate them.
Why Founders Should Care?
The practical risk is not that founders intentionally give away too much of the company. The practical risk is that SAFEs feel informal. A founder may raise a small angel SAFE to extend runway. Then another SAFE from a strategic investor. Then a friends-and-family extension. Then one more SAFE before a priced seed round. Each financing seems manageable in isolation. But with post-money SAFEs, each new SAFE can increase founder dilution without reducing the ownership percentage already promised to prior SAFE investors. By the time the company finally completes a priced round, the founders may discover that a much larger portion of the company has already been economically allocated than they expected.
What We Are Seeing in the Market?
In our practice, we increasingly see founders raising multiple rounds of capital through post-money SAFEs before completing a priced financing. This is not surprising. Post-money SAFEs have become the market standard for many early-stage financings because they provide investors with greater certainty regarding the ownership percentage they are purchasing. That certainty often makes financings easier to negotiate and has contributed to the widespread adoption of the post-money SAFE.
The tradeoff, however, is that the same certainty that benefits investors can create unintended consequences for founders who complete multiple SAFE financings before a priced round. Many founders understandably focus on the amount of capital being raised rather than the cumulative ownership percentages being promised. By the time a Series Seed or Series A financing is underway and the capitalization table is modeled in detail, founders are often surprised by how much ownership has already been allocated to SAFE investors.
None of this means founders should avoid post-money SAFEs. They are often the appropriate financing instrument and, in many cases, are exactly what investors expect to see. Rather, founders should recognize the tradeoff: the simplicity and market acceptance of the post-money SAFE come with a different allocation of dilution risk than the traditional pre-money SAFE.
Key Takeaway
- Post-money SAFEs are not bad instruments. In many circumstances, they are entirely appropriate and may be the most efficient way to raise early-stage capital.
- The important point is that founders should understand the economic consequences before signing them. A SAFE may not immediately issue stock, but it can have a significant impact on ownership when it ultimately converts.
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- Before issuing multiple SAFEs, founders should model the capitalization table under different financing scenarios and understand who bears the dilution from future SAFE issuances. A few hours spent analyzing the cap table today can prevent a very unpleasant surprise during the company’s first priced financing.
- At Gesmer Updegrove LLP, we regularly help founders evaluate SAFE financings, model dilution scenarios and build venture capital-quality capitalization tables so they can make informed fundraising decisions before signing the documents.
Disclaimer
This article is provided for informational purposes only and does not constitute legal, tax, accounting, or business advice. Every transaction is unique, and the issues discussed above may apply differently depending on the facts and circumstances involved. Readers should consult with qualified professional advisors regarding their specific situation before taking any action based on the information contained in this article.
