Sample frameDay 307·Entrepreneurship · Dilution

A SAFE doesn't skip the valuation conversation. It moves it — and moves the arithmetic with it.

Entrepreneurship.

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The question

If you've taken money on a SAFE or a note, could you say this morning, without opening a spreadsheet, what percentage of your company those instruments convert into at a priced round — and what's left of your own holding once the new investor and the pool land on top?

The idea

Y Combinator introduced the SAFE — a simple agreement for future equity — in late 2013, drafted by Carolynn Levy, a lawyer at the firm. It was built to replace the convertible note: no interest, no maturity date, no debt sitting on a company that has already spent the money, and a document short enough to read in a sitting. What it doesn't do is remove the valuation. It postpones it. The SAFE converts at a priced round, and in that single moment the cap, the discount and every other instrument you've signed all settle at once against the same cap table. In 2018 Y Combinator replaced its original with a post-money version, and the change is the part founders miss. Under the original, dilution from later SAFEs was shared among the SAFE holders. Under the post-money form each investor's percentage is fixed at signing, so every further SAFE you sell dilutes you and not them. That's an honest trade — the number is knowable the day you sign — but the trap is that almost nobody keeps the running total. Three caps across eighteen months, plus new money, plus the pool the investor requires, comes to a figure that surprises only the person who could have calculated it all along.

The framework

01
Cap and discount are two different bets.
A discount converts your investor at a fixed percentage below whatever the priced round settles at — a reward for being early, worth more the higher that round prices. A cap fixes the highest valuation their money will convert at, which is a bet that the company will be worth considerably more later. Most instruments carry both and convert on whichever produces more shares for the investor. So a cap isn't a valuation and it isn't a ceiling on ambition. It's the number your earliest money ends up owning you at, and it should be set with the next round in view rather than this month's confidence.
02
What does the next instrument cost the last one?
This is the whole difference between the original SAFE and the post-money version, and it decides who absorbs the next cheque. Under the original, everyone's eventual ownership shifted as more instruments were sold. Under the post-money form, each investor's percentage is locked when they sign, so every further SAFE dilutes the founders and the common stock alone. The benefit is that the figure is knowable on the day — you can state exactly what you've sold. The obligation that comes with it is that somebody has to keep adding it up, and that somebody is you.
03
Build the conversion table before you sign the next one.
One spreadsheet, four columns: instrument, amount, cap or discount, and the percentage it converts into at a realistic priced-round valuation. Add the new money, and add the pool the term sheet asks for — that figure is argued elsewhere, so take it as given here. What comes out the bottom is your holding after the round. Then do the thing that makes the table worth building: set the floor. Decide the percentage you will not go below, write it down, and work backwards from it to the largest instrument you can still sign. An hour's work, and it belongs before the next signature rather than after the last one.
04
Notes carry a clock; SAFEs carry a queue.
A convertible note is debt. It accrues interest and it has a maturity date at which the holder can in principle demand repayment from a company that has already spent the money, so that date is real leverage and worth knowing to the day. A SAFE takes away the clock but not the queue: the instruments simply sit there waiting for a priced round that might be years off, and some carry a most-favoured-nation clause that quietly upgrades them to any better terms you give a later investor. Read everything you've already signed before drafting another.

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