How most first money is raised now — fast, cheap, and much easier to get wrong than founders expect.
15 min read · Level 4
SAFEs are so easy to sign that founders stack four or five and never model the cumulative conversion — which is invisible until the priced round, when it all lands at once and the real ownership becomes apparent. The cap, not the headline round price, determines what your early investors own. If you take one thing from this: model the conversion before signing the next one, not after.
A SAFE (Simple Agreement for Future Equity) is an investor giving money now for shares later, when a priced round happens. No interest, no maturity date, not a loan.
A convertible note does the same thing but is legally a loan — it carries interest and a maturity date.
Both usually have a valuation cap (the maximum valuation at which they convert) and/or a discount (a percentage off the round price).
Because they let you raise quickly without agreeing a valuation, which is genuinely useful when the company is too early to value.
And because they are the single most common place founders are surprised. SAFEs are so easy to sign that founders stack four or five of them, then discover at the priced round that they have given away far more than they realised — because until conversion, none of it shows on the cap table.
This is educational information, not investment, securities or financial advice. Rules differ by country and change — get advice from a qualified professional in your jurisdiction before acting.
Sources: Y Combinator — SAFE financing documents; NVCA — model legal documents
You raise $500,000 on SAFEs with a $5M cap. Later you raise a $3M priced round at a $15M pre-money.
The SAFE holders do not convert at $15M. They convert at their $5M cap — so their $500k buys shares as though the company were worth $5M:
The cap gave them roughly three times the equity. That is exactly what it is for — they took the early risk.
The surprise is what it does to you. Before the round you believed you owned 100%. After conversion plus the new round, you are at roughly 68%, not the ~80% you might have assumed from the priced round alone.
Stack four SAFEs at different caps and this becomes genuinely hard to intuit. Model it before signing the next one.
The biggest: signing successive SAFEs without modelling cumulative conversion. Each one feels small. Together they are a round.
The second: not understanding post-money SAFEs. The current standard post-money SAFE fixes the investor's percentage — meaning all subsequent dilution before the priced round falls on you, not shared with them. This differs from the older pre-money version and it matters.
The third, for notes specifically: forgetting the maturity date is real. If no priced round happens before it, the note is technically repayable — which a startup usually cannot do. In practice it gets extended, but you are negotiating from a weak position.
Amount, cap, discount, date, and whether pre- or post-money. Founders lose track surprisingly fast.
Before signing a new one, calculate what happens if a priced round occurs at a realistic valuation. Sum all conversions.
With both, the investor gets whichever is better for them — not an average. Assume the more expensive outcome for you.
Post-money SAFEs fix the investor's percentage, so later dilution before the round lands entirely on the founders.
A common guideline is to keep total SAFE money under about 20–25% of the expected next round's post-money. Beyond that, do a priced round instead.
Standard YC SAFEs are well understood. A modified one is a different document, and the modifications are always in someone's favour.
For early rounds, angel money, and bridges between priced rounds — where speed and low legal cost genuinely matter.
Once the round is large, once there are many investors, or when investors want board seats and formal rights. At that point a priced round is cleaner and the extra legal cost is worth it.
Five hundred thousand on SAFEs at a five-million cap, converting into a round priced at fifteen million, buys roughly ten percent rather than the three-point-three the round price implies. That is the instrument working as designed — the early investor took early risk — and it is routinely a surprise.
Model every SAFE against a realistic future round price before signing. The gap between the two numbers is what you are actually agreeing to.
The current standard post-money SAFE fixes the investor's percentage, which means all subsequent dilution before the priced round falls on the founders rather than being shared. It differs meaningfully from the older pre-money version and the documents look nearly identical.
Check whether each SAFE is pre or post-money and record it. Stacking post-money SAFEs concentrates dilution on you in a way few founders model.
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