Fundraising

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

Authors: Andrew Shawber

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:

SAFE Price   =

Valuation Cap


Company Capitalization

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:

Initial Shares Initial %
Founders                     8,000,000 80%
Option Pool                     2,000,000 20%
Total                    10,000,000 100%

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

After $2.5 million pre-money SAFEs sold:

Shares %
Founders         8,000,000 64%
Option Pool         2,000,000 16%
Pre-Money SAFE Holders         2,500,000 20%
Total       12,500,000 100%
SAFE Price  $  1.00

After $4.0 million pre-money SAFEs sold:

Shares %
Founders           8,000,000 57%
Option Pool           2,000,000 14%
Pre-Money SAFE Holders           4,000,000 29%
Total         14,000,000 100%
SAFE Price  $  1.00

After $5.0 million pre-money SAFEs sold:

Shares %
Founders         8,000,000 53.3%
Option Pool         2,000,000 13.3%
Pre-Money SAFE Holders         5,000,000 33.3%
Total       15,000,000 100%
SAFE Price  $   1.00

 

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:

Shares %
Founders         8,000,000 60%
Option Pool         2,000,000 15%
Post-Money SAFE Holders         3,333,333 25%
Total       13,333,333 100%
SAFE Price  $   0.75

After $4.0 million post-money SAFEs sold:

Shares %
Founders           8,000,000 48%
Option Pool           2,000,000 12%
Post-Money SAFE Holders           6,666,666 40%
Total         16,666,666 100%
SAFE Price  $   0.60

After $5.0 million post-money SAFEs sold:

Shares %
Founders         8,000,000 40%
Option Pool         2,000,000 10%
Post-Money SAFE Holders       10,000,000 50%
Total       20,000,000 100%
SAFE Price  $   0.50

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.

How to Prepare for an Equity Financing

We have covered in past FTTWs how to value your startup and how much capital to raise. Once your startup decides to pursue equity financing, you should start to prepare for the investor due diligence process. On the business side, you will need to prepare a business plan and should take steps such as obtaining management references, interviews and background reviews, customer/user references, technical/product reviews, financial statements and business model reviews.

What Every Startup Needs to Know

On Wednesday, June 26th, Perkins Coie’s Palo Alto office hosted the startupPerColator event, “What Every Startup Needs to Know.” Lowell Ness, a Perkins Coie partner in the Emerging Companies & Venture Capital (ECVC) practice, moderated a panel which included Herb Stephens of NueHealth, Thomas Huot of VantagePoint Capital, Jennifer Jones of Jennifer Jones and Partners, Yuri Rabinovich of Start-up Monthly, and Olga Rodstein of Shutterfly.