Understanding SAFEs and Priced Equity Rounds

Nathoo says founders need to understand how much of the company they have sold and still own, even when investments have not yet become shares. A simple spreadsheet can track who owns how many shares, and founders remain responsible for understanding the cap table.

A SAFE gives an investor a promise of future shares in exchange for money now. Nathoo says its main negotiation points are the investment amount and valuation cap; unlike convertible debt, a SAFE has no interest rate or maturity date. The document also covers conversion in a priced round, a company sale, or a shutdown.

Post-money SAFEs make it easier to estimate the ownership sold: investment amount divided by the post-money valuation cap. In Nathoo's example, two investments of $200,000 at a $4 million cap and $800,000 at an $8 million cap give investors 5% and 10%, or 15% combined. Founders should account for that dilution even before the SAFEs convert into shares.

Nathoo walks through a company with a $15 million pre-money valuation raising $5 million, for a $20 million post-money valuation. The SAFEs convert first, the option pool is increased to 10%, and then the new investors buy shares. In the example, the lead investor owns 20%, all Series A investors own 25%, and the founders own 51.5% after closing.

Nathoo recommends avoiding a mix of SAFEs and convertible notes because it complicates the calculations, and says companies with pre-money SAFEs can still use post-money SAFEs later. She cautions founders against pushing valuation caps too high: in her example, raising one cap from $8 million to $10 million changed founder ownership at closing from 51.5% to 52.7%.