How SAFEs Convert: A Guide for Founders

Your Series A is underway. The lead investor asks about your SAFEs from the seed round. You suddenly realize you don't actually know how many shares they'll convert into or how much dilution you're facing.

This is the moment most founders discover that SAFE conversion mechanics are more nuanced than they expected. The good news? The math follows clear rules once you understand the fundamentals. The bad news? Those rules can produce surprising results if you haven't modeled them ahead of time.

In this guide, you'll learn exactly how SAFEs convert to equity, why valuation caps and discount rates behave differently, and how to calculate your dilution when multiple SAFEs convert simultaneously. By the end, you'll be able to model your own scenarios and avoid expensive surprises at your priced round.

SAFE Basics

Before diving into conversion mechanics, let's establish what a SAFE actually is and the key terms that govern how it converts.

A SAFE (Simple Agreement for Future Equity) is neither debt nor equity. It's a contractual promise that converts into equity shares at a future priced financing round. Unlike Convertible Notes, SAFEs have no interest rate, no maturity date, and no repayment obligation. They exist in a holding pattern until a qualifying event triggers conversion.

Y Combinator popularized SAFEs and maintains standard templates, each with different economic terms:

1. Valuation Cap, no Discount: Investor gets shares based on a maximum valuation ceiling
2. Discount, no Valuation Cap: Investor gets shares at a reduced price compared to new investors
3. Uncapped MFN (Most Favored Nation): No valuation cap and no discount SAFE, but investor automatically receives the best terms given to any subsequent SAFE investors
4. Valuation Cap AND Discount: Investor gets the better of the two methods (note: YC no longer offers this variant as a template, but it's still common in practice)

Understanding how each type converts requires clarity on three critical terms:

1. Valuation Cap: The maximum company valuation at which the SAFE converts. If your Series A values the company higher than this cap, the SAFE holder gets a better deal than new investors.
2. Discount Rate: A percentage reduction from the Series A price per share, meaning the SAFE holder pays less than new investors. Typically 15-25%. A 20% discount means paying 80% of what Series A investors pay.
3. MFN (Most Favored Nation): An automatic upgrade clause. If you issue subsequent SAFEs with better terms, earlier MFN holders get upgraded to match those terms.

The post-money SAFE (introduced by YC in 2018) fundamentally changed the conversion math by fixing ownership percentage at the time of investment rather than at conversion. This gives founders and early investors more predictable dilution and eliminates some complex edge cases from the original pre-money SAFE structure.

All examples in this guide use post-money SAFE mechanics.

Capped SAFE Conversion

The valuation cap is the most common SAFE term and the easiest to understand. It establishes a maximum valuation at which the SAFE converts to equity, protecting early investors if your company's valuation increases significantly by the time of your priced round.

Caps are typically negotiated based on comparable companies at similar stages in your industry and location. Factors like existing traction, team experience, market size, and competitive dynamics all influence the discussion. Research recent deals in your space by talking to other founders, investors, startup lawyers, and accelerators to understand what's reasonable for companies at your stage. A cap that's too low creates excessive dilution; one that's too high may make it difficult to find investors willing to take early-stage risk.

The ownership calculation for a post-money SAFE with a valuation cap is straightforward:

Ownership Percentage = Investment Amount / Valuation Cap

This formula determines the investor's ownership at the moment of SAFE conversion. If they invest $500,000 at a $5,000,000 post-money cap, they receive 10% ownership when the SAFE converts. However, this 10% then gets diluted by the new money coming in from the triggering round itself.

Here's how this plays out in practice. Imagine you raised that $500,000 SAFE at a $5,000,000 post-money cap during your seed round. Later, you're raising a Series A at a $20,000,000 pre-money valuation. The SAFE investor's conversion depends on comparing the cap to the Series A valuation.

Before the Series A, the company has 10,000,000 shares outstanding (before any new investment). The Series A price per share is $20,000,000 / 10,000,000 = $2.00. The SAFE investor could convert at this Series A price, receiving $500,000 / $2.00 = 250,000 shares (2.44% ownership after conversion).

However, the cap gives them a better option. Post-money SAFEs use the YC algebraic method: the investor's ownership equals their investment divided by the cap ($500,000 / $5,000,000 = 10%). Here's how we solve for the shares:

• The SAFE holder must own exactly 10% of the post-conversion company
• Let X = total shares after conversion
• Base shares + SAFE shares = X, where SAFE shares = 10% × X
• So: 10,000,000 + 0.10X = X → 10,000,000 = 0.90X → X = 11,111,111
• SAFE shares = 10% × 11,111,111 = 1,111,111 shares

After conversion but before the new Series A round is closed, there are now 11,111,111 total shares outstanding. The SAFE holder owns 1,111,111 / 11,111,111 = exactly 10% of the company.

This illustrates the key principle: when your Series A valuation exceeds the SAFE cap, the cap holder gets more shares than they would at the Series A price. The cap effectively gives them a discount on shares that increases as your valuation grows.

But what happens when the Series A money actually comes in? The SAFE converts first, then the new investment creates additional shares which dilutes everyone, including the SAFE holder who just converted:

The SAFE holder's 10% ownership at conversion becomes 8% after the Series A investment. The triggering round dilutes everyone, including the converting SAFE holder.

The post-money SAFE structure ensures this ownership percentage holds steady. If you issue additional shares between the SAFE investment and Series A (through option pool expansions or other SAFEs), the cap holder still receives their full target ownership percentage. The conversion math adjusts to issue them more shares based on the current share count. This means founders bear any interim dilution, not the SAFE holder.

Multiple SAFEs Converting Together

Most companies raising on SAFEs issue them to multiple investors over several months. Understanding how these SAFEs interact during conversion is critical for accurate dilution modeling.

The fundamental principle: all SAFEs convert simultaneously using the same pre-conversion share count. They do not dilute each other. This differs significantly from convertible notes, which convert sequentially and can dilute earlier notes.

Let's model a realistic scenario that reflects how most founders actually raise. Startups commonly raise multiple SAFEs before a priced round, with the majority using capped SAFEs that increment as the company progresses. Here's a typical pattern:

• SAFE 1 (Pre-seed): $150,000 at $4,000,000 cap
• SAFE 2 (Post-MVP, +6 months): $350,000 at $6,000,000 cap
• SAFE 3 (Pre-Series A bridge, +12 months): $500,000 at $8,000,000 cap

This progression reflects best practice: incrementing caps for each subsequent SAFE acknowledges the company's growth and reduced risk over time.

Your $20M pre-money Series A closes with 5,000,000 shares outstanding before any conversions. Using the YC algebraic method, we first calculate each SAFE's ownership percentage, then solve for the post-conversion share count.

Step 1: Calculate ownership ratios

Each SAFE's ownership is simply Investment / Cap:

• SAFE 1: $150,000 / $4,000,000 = 3.75%
• SAFE 2: $350,000 / $6,000,000 = 5.83%
• SAFE 3: $500,000 / $8,000,000 = 6.25%
• Total SAFE ownership: 15.83%

Step 2: Solve for post-conversion shares

Since existing shareholders retain (100% - 15.83%) = 84.17% of the company:

Post-conversion shares = 5,000,000 / 0.8417 = 5,940,359 shares

Step 3: Calculate each SAFE's shares

• SAFE 1: 5,940,359 × 3.75% = 222,763 shares
• SAFE 2: 5,940,359 × 5.83% = 346,323 shares
• SAFE 3: 5,940,359 × 6.25% = 371,272 shares
• Total SAFE shares: 940,358 shares

After all SAFEs convert, the share count becomes 5,940,359 shares (before the new Series A money arrives). The SAFE holders collectively own 15.83% of the company.

Notice that each SAFE's ownership was calculated independently against its own cap. SAFE 1 didn't reduce the ownership available to SAFE 2 and SAFE 3. This simultaneous conversion prevents a dilution cascade where early SAFEs disadvantage later ones.

Each SAFE's ownership percentage is calculated against the "Company Capitalization" defined as all outstanding shares immediately before the conversion (including shares reserved for employee options but excluding the converting SAFEs themselves).

For founders, this means you can model each SAFE's ownership in isolation, sum the ownership percentages, then solve for total shares.

Uncapped SAFE with Discount

An uncapped SAFE with only a discount rate takes a fundamentally different approach. Instead of capping the valuation, it reduces the price per share the SAFE holder pays relative to Series A investors.

Just like capped SAFEs, the YC algebraic method also applies to discount SAFEs. The key insight: a 20% discount is equivalent to the investor's money being worth 25% more (since $500K / 0.80 = $625K). This "discount-adjusted investment" determines their ownership percentage.

Let's work through a complete example. You raised $500,000 on a SAFE with a 20% discount and no cap. At your Series A, the company is valued at $20,000,000 pre-money with 10,000,000 shares outstanding.

Here's how the YC method calculates the shares:

• Discount-adjusted investment = $500,000 / 0.80 = $625,000
• Ownership ratio = $625,000 / $20,000,000 = 3.125%
• Post-conversion shares = 10,000,000 / (1 - 0.03125) = 10,322,581
• SAFE shares = 3.125% × 10,322,581 = 322,581 shares

The SAFE holder owns 322,581 / 10,322,581 = 3.125% of the company.

But what happens when the Series A money actually comes in? Just like with capped SAFEs, the triggering round dilutes everyone, including the converting SAFE holder.

The SAFE holder's 3.125% ownership at conversion becomes 2.5% after the Series A investment.

Uncapped with Discount vs Capped Without Discount SAFE

How does a discount-only SAFE compare to a capped SAFE? The difference can be dramatic depending on your Series A valuation.

Using our previous example with a $500,000 investment and a $20,000,000 pre-money Series A with 10,000,000 shares outstanding:

• 20% Discount (no cap): $500,000 / 0.80 = $625,000 adjusted → $625,000 / $20,000,000 = 3.125% → 322,581 shares
• $5M Cap (no discount): $500,000 / $5,000,000 = 10% → 1,111,111 shares

The cap provides significantly better terms in this high-valuation scenario.

This reveals the fundamental tradeoff between caps and discounts. Discounts provide modest pricing advantages but scale linearly with the Series A valuation. Caps provide escalating advantages as valuations rise, offering stronger downside protection for investors.

For investors: Caps are almost always preferable. A cap protects them if your company's valuation skyrockets, while a discount alone leaves them with minimal benefit in a successful outcome.

For founders: Discount-only SAFEs result in less dilution when valuations exceed expectations. However, most investors will insist on a valuation cap as a standard term.

The Hybrid Scenario: Cap Plus Discount

While no longer offered as a template from YC, SAFEs can be modified to include both a valuation cap and a discount rate. When both terms are present, the SAFE converts using whichever method gives the investor more shares. This "most favorable terms" principle ensures the investor gets the better deal.

Example: $20M Series A (above cap)

You raised $500,000 on a SAFE with both a $5,000,000 valuation cap and a 20% discount. Your Series A comes in at a $20,000,000 pre-money valuation with 10,000,000 shares outstanding.

• Cap method: $500,000 / $5,000,000 = 10% ownership → 1,111,111 shares
• Discount method: $500,000 / 0.80 = $625,000 adjusted → $625,000 / $20,000,000 = 3.125% ownership → 322,581 shares
• Winner: Cap (1,111,111 > 322,581)

The investor receives 1,111,111 shares, representing 10% ownership after conversion.

Example: $5M Series A (at cap)

Same $500,000 SAFE with $5,000,000 cap and 20% discount, but the Series A comes in at exactly $5,000,000 pre-money with 10,000,000 shares:

• Cap method: $500,000 / $5,000,000 = 10% ownership → 1,111,111 shares
• Discount method: $500,000 / 0.80 = $625,000 adjusted → $625,000 / $5,000,000 = 12.5% ownership → 1,428,571 shares
• Winner: Discount (1,428,571 > 1,111,111)

The investor receives 1,428,571 shares, representing 12.5% ownership after conversion.

This dynamic means that in a cap-plus-discount SAFE, the discount functions as insurance. If your company's valuation disappoints and comes in near or below the cap, the discount provides additional cushion for the investor. If valuations soar well above the cap, the cap alone provides sufficient benefit and the discount becomes irrelevant. Whichever method wins, the resulting ownership gets diluted by the triggering round's investment.

How Discount Rates Impact Conversion

The magnitude of the discount rate dramatically affects how many shares SAFE holders receive, particularly for uncapped SAFEs. Understanding this relationship helps founders evaluate term sheets and model dilution scenarios.

For uncapped SAFEs at a $20,000,000 pre-money valuation with 10,000,000 shares, here's how different discount rates affect a $500,000 investment using the YC algebraic method:

Adjusted Investment = $500K / (1 - discount). Ownership = Adjusted Investment / $20M pre-money.

Each 5% increment in the discount rate produces approximately 0.2% additional ownership for the SAFE holder. While this might seem modest, it represents meaningful dilution at scale. If you have multiple SAFEs with varying discount rates, these differences compound across your cap table.

For capped SAFEs, the discount rate only matters in specific valuation scenarios. The table below shows when the discount becomes relevant for a $500,000 SAFE with a $5,000,000 cap (with 10,000,000 shares outstanding) and varying Series A valuations:

Both methods use the YC algebraic method. Cap ownership = $500K / $5M = 10%. Discount ownership = ($500K / 0.80) / pre-money valuation.

The critical threshold occurs when the Series A valuation equals the cap. Above this point, the cap dominates and the discount is irrelevant. At or below this point, the discount provides incremental benefit.

This explains why investors typically negotiate both a cap and a discount even though one might seem redundant. The cap protects against high valuations (the investor's best-case scenario), while the discount protects against disappointing valuations that come in near the cap (the investor's worst-case scenario within a successful outcome).

When modeling your dilution, focus most attention on the cap in capped SAFEs. Unless you anticipate a down round or flat valuation, the cap will drive the conversion math. Reserve mental energy for the discount only if your Series A valuation might come in close to your SAFE caps.

The Uncapped MFN SAFE

The Uncapped MFN SAFE contains no valuation cap and no discount, just Most Favored Nation protection. This variant exists for very early investors (often the first check, highest risk) when founders can't yet justify a specific valuation cap or are needing to quickly close on an early investor.

The MFN clause gives the investor the right to upgrade to better terms if you later issue SAFEs with caps or discounts. When you issue a subsequent SAFE, you must notify the MFN holder, who can then elect to adopt the better terms within a pre-defined window.

Let's see how this works in practice with MFN protection. Imagine you raise from two investors before your Series A:

• First investor: $100,000 Uncapped MFN SAFE (no cap, no discount)
• Second investor (3 months later): $500,000 SAFE at $5,000,000 cap

When you issue the second SAFE, you notify the first investor of the better terms. They elect to adopt the $5,000,000 cap, and their SAFE is amended accordingly. By the time you close your Series A at $20,000,000 pre-money with 10,000,000 shares outstanding, both SAFEs convert using the same cap:

• Second investor: $500,000 / $5,000,000 = 10%
• First investor (MFN upgraded): $100,000 / $5,000,000 = 2%
• Combined SAFE ownership: 12%

Post-conversion shares = 10,000,000 / (1 - 0.12) = 10,000,000 / 0.88 = 11,363,636.

• Second investor shares: 10% × 11,363,636 = 1,136,364
• First investor shares: 2% × 11,363,636 = 227,273

Without MFN protection, the second investor still converts using their $5M cap (10%), but the first investor converts at the Series A price:

• First investor ownership: $100,000 / $20,000,000 = 0.5%
• Combined ownership = 10% + 0.5% = 10.5%

Post-conversion shares = 10,000,000 / (1 - 0.105) = 10,000,000 / 0.895 = 11,173,184.

• First investor: converts at $20,000,000 / 11,173,184 = $1.79/share
• First investor shares: $100,000 / $1.79 = 55,866 shares (0.5% ownership)

What if there's no subsequent SAFE? In rare cases, an Uncapped MFN SAFE investor may not have an opportunity to upgrade their terms. For example, if the company goes directly from the MFN SAFE to a priced round without issuing any SAFEs in between.

Using the same values: a $100,000 Uncapped MFN SAFE followed directly by a Series A at $20,000,000 pre-money with 10,000,000 shares outstanding.

Per the YC SAFE terms, an Uncapped MFN SAFE investor converts at the same price as the new Series A investors:

• Series A price = $20,000,000 / 10,000,000 = $2.00/share
• SAFE shares = $100,000 / $2.00 = 50,000 shares
• Ownership = 50,000 / 10,050,000 = 0.5%

The table below compares all three scenarios for the $100,000 uncapped MFN SAFE investor:

Key insight: MFN protection only helps if subsequent SAFEs with better terms are actually issued. Without a subsequent SAFE to adopt terms from, the Uncapped MFN SAFE investor converts at the Series A valuation regardless of MFN protection.

Common Pitfalls

Avoid the pitfalls below to save you from unpleasant surprises when you reach your priced round.

Treating caps as valuations: A $5M cap doesn't mean your company is "valued at $5M." The cap is a conversion ceiling, not a valuation. Using it as valuation in press releases or investor updates creates confusion and complicates future fundraising when your Series A pre-money differs from your "previous valuation."

Too many SAFEs: Each additional SAFE increases conversion complexity and dilution tracking burden. Aim for 2-3 SAFEs maximum before your Series A. Beyond this, the administrative overhead of managing multiple conversion calculations outweighs the benefit of small incremental raises. If you need more capital, raise a larger SAFE from fewer investors or accelerate your priced round timeline.

Underestimating aggregate dilution: Founders focus on individual investor percentages rather than aggregate impact. Three SAFEs of $300,000 each at a $5,000,000 cap collectively convert to 18% ownership, not the 6% you might assume from each individual SAFE in isolation. Model the complete conversion scenario to understand your true post-Series A ownership.

Caps too low: A $2,000,000 cap might seem reasonable when you're pre-product, but if you're raising a Series A at $10,000,000 eighteen months later, that early SAFE will convert to 5x the ownership you expected. Benchmark caps against realistic Series A valuations for your stage and sector. Seed-stage B2B SaaS companies typically raise Series A between $8M-$15M. Set caps in the $4M-$6M range to avoid excessive dilution.

Discounts too high: Discount rates above 25% signal desperation or inexperience. Standard market discounts range from 15-20%. A 30% or 40% discount tells Series A investors you either couldn't negotiate reasonable terms or accepted predatory terms from early investors. This creates unfavorable signaling that can hurt your priced round negotiations.

Underestimating option pool impact: Reserve 10-20% for employee options before calculating dilution. Many founders model SAFE conversions and realize they have no room for a meaningful pool without severe founder dilution. Plan the option pool first, then size your SAFEs accordingly. Additionally, Series A investors typically require the option pool from pre-money capitalization, meaning it dilutes founders and converted SAFE holders, not new investors. Discuss this explicitly with SAFE investors so they understand their post-Series A ownership will account for this.

Pre-money vs post-money confusion: The post-money SAFE (2018 version) calculates ownership differently than the pre-money SAFE (2013 version). If you have both types outstanding, you cannot use the simple simultaneous conversion model. Verify which version each SAFE uses and model accordingly. When in doubt, assume post-money for any SAFE issued after 2018.

Negotiating in a vacuum: Your SAFE terms interact with future round economics. A $5,000,000 cap seems fine until you realize your Series A lead wants a $4,000,000 pre-money because they see the outstanding SAFEs. Model the full Series A scenario including SAFE conversions, option pool, and new money. Optimize for your post-Series A ownership, not just the SAFE terms in isolation.

SAFE Cap Table Health Check

Before signing your next SAFE, run through this quick assessment to ensure your terms are reasonable for your stage:

If your metrics fall outside these ranges, revisit your terms before signing. If you have to take the less founder-friendly terms, understand the implications for the future rounds. A few percentage points of dilution now compounds through every future round.

Key Takeaways

Understanding how SAFEs convert is essential for founders planning their fundraising strategy and managing dilution. Here are the most important concepts to remember:

1. SAFEs are equity agreements, not debt Post-money SAFEs fix your ownership percentage at the time of investment. Unlike convertible notes, there's no repayment obligation, no interest accrual, and no maturity date. Your ownership is locked in from day one.
2. The conversion math is straightforward For post-money SAFEs, your ownership percentage is simply Investment Amount ÷ Valuation Cap. A $100K investment on a $5M cap gives the investor exactly 2% ownership, regardless of what happens at the priced round.
3. Multiple SAFEs convert simultaneously and their dilution stacks All SAFEs convert at the same moment using the pre-existing share count, they don't dilute each other the way convertible notes do. However, aggregate dilution adds up quickly: three investors each putting in $100K on a $5M cap collectively own 6% of your company (3 × 2%).
4. Valuation caps typically win over discounts at high valuations In most successful fundraising scenarios, the cap produces better terms for investors than the discount. If you raise at a $20M Series A valuation with a $5M cap and 20% discount, the cap gives investors 4x more shares than the discount would.
5. SAFEs experience two-step dilution at conversion SAFE investors convert into their fixed ownership percentage, then immediately get diluted by the new priced round investment. A 10% SAFE might drop to 8% post-Series A after the new investors buy their 20% stake.
6. Plan your option pool expansion before signing term sheets Series A investors typically require a 10-15% option pool on a pre-money basis, which dilutes everyone including SAFE holders. Factor this into your dilution models before finalizing your round structure.
7. Model conversion scenarios early and often Use a cap table calculator to project how different Series A valuations will affect SAFE conversions and founder dilution. Running these scenarios before you sign SAFEs helps you choose appropriate caps and understand your dilution path.
8. Legal validation catches modeling errors Request full SAFE conversion calculations from lawyers 30+ days before closing. Founders regularly find discrepancies in ownership percentages, share counts, or cap table math. Your spreadsheet might be wrong, make sure to verify.

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Ready to model your own SAFE scenarios? Our free cap table tool lets you experiment with different caps, discounts, and multiple SAFEs to see exactly how they'll convert. Add your outstanding SAFEs, input your expected Series A terms, and instantly see your dilution. No spreadsheet formulas required.

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Understanding SAFE conversion mechanics gives you control over one of the most significant sources of dilution in your cap table. Model early, model often, and avoid surprises when your priced round arrives.