What is the Difference Between “Pre-Money” and “Post-Money” Valuation Cap SAFEs?

The difference is in the potential dilutive impact of the SAFE on founders. Post-money SAFEs can dilute founders significantly more than pre-money SAFEs.

When SAFEs with a valuation cap convert to equity in a future financing, the price at which they convert is determined as follows:

The SAFE price is used to determine how many shares the SAFE holders get when they convert. The larger the “company capitalization,” the lower the SAFE price will be. And the lower the SAFE price, the more shares are issued to SAFE holders and the more dilution the founders experience.

The difference lies in how pre-money and post-money SAFEs calculate “company capitalization”:

• For pre-money SAFEs,” company capitalization” excludes all securities converting in the financing (such as SAFEs and convertible notes), called “converting securities.”
• For post-money SAFEs,” company capitalization” includes those converting securities.

What’s more, in theory it is possible for a company to sell enough post-money SAFEs to wipe out the founders completely. (This has actually happened before.) But that wouldn’t happen with pre-money SAFEs.

Takeaway: Pre-money SAFEs are preferable unless you can be certain that you’ll only sell a limited dollar amount of SAFEs before the next equity financing (but that’s a hard thing for anyone to know up front).

See the cap tables that follow for example scenarios illustrating this point.

For Example:

Company A has 8,000,000 founders shares and 2,000,000 option pool shares prior to the SAFE round. Their initial cap table looks like this:

Scenario 1: Pre-Money SAFE at $10MM Valuation Cap

After $2.5 million pre-money SAFEs sold:

After $4.0 million pre-money SAFEs sold:

After $5.0 million pre-money SAFEs sold:

Notice that the pre-money SAFE price stays the same as more SAFEs are sold, so the founder dilution does not exhibit a sharply pronounced increase as more SAFEs are sold.

Scenario 2: Post-Money SAFE at $10MM Valuation Cap

After $2.5 million post-money SAFEs sold:

After $4.0 million post-money SAFEs sold:

After $5.0 million post-money SAFEs sold:

Notice that the post-money SAFE price starts lower and goes down, rapidly increasing the amount of founder dilution as more SAFEs are sold.

This is because the more SAFEs (and other converting securities) are sold, the lower the post-money SAFE price goes, and the more shares are issued to the SAFE holders.