Founders and investors often assume the Y Combinator (YC) pre-money SAFE and the YC post-money SAFE are the same.
Spoiler Alert: They are not.
Keep reading to learn more about one of the major differences between the YC pre-money SAFE and the YC post-money SAFE and why one of the biggest mistakes you can make is assuming the two SAFE types are interchangeable.
Pre-money vs. post-money distinction
The terms “pre-money” and “post-money” in venture capital are typically used to describe valuation. The pre-money valuation is the value of the company before an investment and the post-money valuation is the value of the company after the investment.
Pre-money valuation + the investment amount = Post-money valuation
If a company is raising $5MM at a $45MM pre-money valuation, then the post-money valuation will be $50MM: $45MM + $5MM = $50MM
In the context of the YC SAFEs, the pre-money vs. post-money distinction is important when using a SAFE with a valuation cap because it changes what is included in the company capitalization. This matters because the valuation cap divided by the company capitalization determines the conversion price used to calculate the number of shares the SAFE converts into at the next equity financing round.
Please note if you’re using the YC “Discount only” SAFE or YC “MFN only” SAFE, the following formulas will not apply as the conversion price does not take into account the company capitalization. In addition, this article assumes you are using a YC SAFE, if you’re not, the formulas below may or may not match what’s in your SAFE.
Formula Breakdown
YC Pre-money SAFE Company Capitalization:
Includes:
- all issued and outstanding shares of capital stock (on an as-converted basis)
- all outstanding vested and unvested options, warrants and other convertible securities (note: they are included as if they have converted)
- all shares of common stock reserved and available under the option pool
- any increase to the option pool in connection with the equity financing
Excludes:
- your SAFE
- all other SAFEs
- convertible promissory notes
The exclusion of the SAFE, all other SAFEs and the convertible promissory notes from the company capitalization means that as an investor, when your SAFE converts into equity, you’ll be diluted by any outstanding convertible instruments, including other SAFEs. This means the more SAFEs the company issues prior to your SAFE converting, the more dilution you will experience.
YC Post-money SAFE Company Capitalization:
Includes:
- all shares of capital stock issued and outstanding
- your SAFE
- all other SAFEs
- convertible promissory notes
- all (i) issued and outstanding options and (ii) promised options
- all shares of Common Stock reserved and available under the option pool
Excludes:
- any increase to the option pool in connection with the equity financing
In contrast, with the post-money SAFE, when your SAFE converts into equity you will not be diluted by any outstanding convertible instruments, including other SAFEs. This means the founders shoulder the dilutive impact of any additional SAFEs issued prior to the next equity financing round.
Mapping it out
Scenario 1: Chutney raises on the YC pre-money SAFE
Chutney, a company that makes meat-alternative dog treats, is looking to raise $500K to purchase additional warehouse space. Samosa Capital (“Samosa”) agrees to invest $500K into Chutney on a pre-money SAFE with a valuation cap of $10MM. Six months later, Chutney is featured on “Oprah’s Favorite Things” and needs more capital to keep up with increased demand. Chutney decides to raise another $500K from additional seed investors using the same pre-money SAFE. Let’s see how Samosa’s ownership changes over time.
Samosa’s ownership after investing on the pre-money SAFE = ~5%.
- Note: This is prior to Chutney issuing any additional SAFEs.
- Because YC Pre-money SAFEs dilute one another when they convert, each additional SAFE that Chutney issues prior to its next equity financing will dilute Samosa. This makes it more difficult for Samosa to know its exact ownership until all of the SAFEs convert at the next equity financing.
- Similarly, it is hard for the founders to calculate how much of the company they are giving away until all of the SAFEs convert.
One year later, Chutney raises $5MM for its Series A financing. The Series A investors want 25% of the company in exchange for their investment making the post-money valuation $20MM ($5MM / $20MM = 25%). They also want a 10% post-money option pool.
Samosa’s ownership upon conversion taking into account the converting SAFEs = ~4.5%
Samosa’s ownership after the Series A taking into account the converting SAFEs and 10% option pool = ~2.95%
Want to check the math yourself? Try out our SAFE calculator.
As you can see, Samosa’s ownership changed after taking into account the other converting SAFEs. In this scenario, Chutney only raised an additional $500K on SAFEs so the dilution experienced by Samosa was not significant. However, imagine a scenario that has become more common in recent years where the founders complete multiple SAFE rounds — each with different valuation caps and discounts — before Samosa’s SAFE converts. In that scenario, it would be extremely difficult for Samosa to accurately predict how much dilution it would experience when its SAFE converted and difficult for the founders to calculate how much of the company they were giving away to their investors.
This uncertainty is why many investors prefer to use the post-money SAFE. Let’s see how that scenario plays out for Samosa…
Scenario 2: Chutney raises on the YC post-money SAFE
Assume the same fact pattern as above, but instead of investing on a pre-money SAFE, Samosa and the other SAFE investors invest on a post-money SAFE.
Samosa’s ownership after investing on the post-money SAFE = 5%
- This is calculated by dividing the investment amount by the post-money valuation cap and because the company issuing additional SAFEs will not dilute Samosa, it can calculate its ownership percentage at the time the SAFE is issued.
Samosa’s ownership upon conversion taking into account the converting SAFEs = 5%
- Although there are other seed investors with SAFEs converting, this doesn't dilute Samosa’s ownership. This is because the converting SAFEs do not dilute one another.
Samosa’s ownership after the Series A taking into account the converting SAFEs and 10% option pool = ~3.25%
Want to check the math yourself? Try out our SAFE calculator.
As you can see, one of the main distinctions between the pre-money SAFE and the post-money SAFE is that with the pre-money SAFE, Samosa will be diluted by other SAFEs when its SAFE converts. While investors understand that they will experience some dilution when the company raises additional capital via an equity financing, they do not want to be diluted by other SAFE investors that invest prior to such SAFE round.
In addition, the post-money SAFE makes it easier to calculate ownership at the time of the SAFE issuance. For investors, this is important. Most venture funds target a certain ownership percentage for the investments they make. Using the post-money SAFE, they can easily calculate how much they need to invest to hit their target ownership. From a founders’ perspective, having clarity on ownership percentages means they can easily track how much of the company they’re giving away with each new investor they add to their cap table.
It’s worth mentioning that another major difference between the pre-money and post-money SAFE is that the pre-money SAFE has pro rata rights built into the SAFE while the post-money SAFE does not (although pro rata rights are sometimes given via a separate side letter). If you’d like to learn more about pro rata rights and SAFEs, check out our Venturepedia.
TL;DR
As a founder, one way to think about the difference between the pre-money SAFE and the post-money SAFE is that the post-money SAFEs have anti-dilution protection. This is because if the company decides to issue additional SAFEs, you’re not diluted by those SAFEs when your SAFE converts.
Conversion math is never easy, and it takes some practice before the numbers are intuitive. Try out our SAFE calculator to model out different scenarios, and see how issuing the pre-money SAFE vs. the post-money SAFE will affect dilution and ownership at the next equity financing.