How SAFE Note Conversion Works
A Simple Agreement for Future Equity (SAFE) converts into equity during a company’s next priced financing round (e.g., Series A). When both a Valuation Cap and a Discount Rate are present in the SAFE agreement, the investor receives the pricing mechanism that produces the lower share price (maximum shares).
Key pricing components: - Cap Share Price: $P_{cap} = P_{round} \times \left( \frac{\text{Valuation Cap}}{\text{Series A Pre-Money}} \right)$ - Discount Share Price: $P_{discount} = P_{round} \times (1 - \text{Discount Rate})$ - Effective Conversion Share Price: $P_{eff} = \min(P_{cap}, P_{discount}, P_{round})$
SAFE Conversion Mathematical Formulas
\[P_{cap} = P_{\text{Series A}} \times \left( \frac{\text{Cap}}{\text{Pre-Money}_{\text{Series A}}} \right)\] \[P_{discount} = P_{\text{Series A}} \times (1 - D)\] \[P_{eff} = \min(P_{cap}, P_{discount})\] \[\text{SAFE Shares Issued} = \frac{\text{SAFE Principal Amount}}{P_{eff}}\] \[\text{Effective Discount (\%)} = \left( 1 - \frac{P_{eff}}{P_{\text{Series A}}} \right) \times 100\]SAFE Conversion Comparison Example
| Metric | Series A Uncapped | Discount Rate (20%) | Valuation Cap ($5M) | Winning Terms |
|---|---|---|---|---|
| Share Price | $10.00 | $8.00 | $4.17 | Valuation Cap |
| Shares Issued ($500k) | 50,000 | 62,500 | 120,000 | +140% Shares |
| Effective Discount | 0.0% | 20.0% | 58.3% | 58.3% Discount |
Step-by-Step Guide to Calculating SAFE Conversion
- Enter SAFE Amount: Input total cash invested into the SAFE.
- Enter Valuation Cap & Discount: Input agreed valuation cap and discount percentage (e.g., $5M cap, 20% discount).
- Input Series A Valuation: Enter pre-money valuation of the priced round.
- Input Series A Share Price: Enter standard uncapped share price for Series A investors.
- View Winning Conversion Trigger: See whether Valuation Cap or Discount Rate gave the investor a better price.
Frequently Asked Questions
What is a SAFE note in startup fundraising?
A SAFE (Simple Agreement for Future Equity) is a financial contract created by Y Combinator that grants investors rights to future equity upon a qualifying priced financing round.
How does a SAFE valuation cap work?
A valuation cap sets a maximum effective valuation at which the SAFE converts into equity. If the priced round valuation exceeds the cap, SAFE holders convert at the lower cap price.
How does a SAFE discount rate work?
A discount rate allows SAFE holders to purchase shares at a percentage discount (e.g., 20%) off the priced round share price.
Does the SAFE convert using the Valuation Cap or Discount Rate?
SAFE holders always receive whichever mechanism produces the lowest share price (i.e. the maximum number of shares).
What is the difference between Pre-Money SAFE and Post-Money SAFE?
A Post-Money SAFE fixes the investor’s ownership percentage regardless of other SAFEs issued, whereas a Pre-Money SAFE ownership dilutes alongside all pre-money instruments.
Is my SAFE note data private?
Yes. All computations execute locally in your web browser.