SAFE stands for Simple Agreement for Future Equity. It is a quick and easy way for investors to invest in companies. After investing via a SAFE, the investment will typically convert into equity in the next "qualified financing" where the company sells preferred stock to cash investors (e.g., your Series Seed or Series A round). The way to calculate how many shares are issued upon conversion of a SAFE is dependent on a few different variables, including your conversion discount (if any), your valuation cap (if any), and whether your valuation cap is pre-money or post-money.
History of SAFEs
The original SAFE was a pre-money SAFE that was developed for the Y-Combinator group in late 2013 as an alternative to convertible notes (if you are looking for more info about SAFEs vs. Convertible Notes, you should check out our article about that here). YC then updated their standard template to be a Post-Money SAFE in 2018. You can view YCombinator's information about the SAFE on their website here.
Even though the current version of YCombinator's SAFE is a "Post-Money" convertible instrument, some founders still prefer to use a "Pre-Money" variation. So, what is the difference, and how do you choose which version to use?
Similarities between Pre-Money and Post-Money SAFEs
The first thing to realize is that Pre-Money SAFEs and Post-Money SAFEs are essentially identical, except for one small (but very impactful) term in the document. You can have conversion discounts (discount rates) in both types of SAFE, you can have MFNs in both types of SAFE, and you can add Pro-Rata Rights in both types of SAFE. The only thing that differs is how you calculate the number of shares that the SAFE holder gets in a Valuation Cap conversion event. If a SAFE is going to convert based on a conversion discount, the pre-money/post-money distinction has zero impact on the conversion calculation.
To re-iterate, the pre-money/post-money distinction in the SAFE only comes into play when the SAFE converts based on the Valuation Cap.
How does the Valuation Cap work?
To understand the difference between pre-money and post-money SAFEs, you need to understand the "Valuation Cap." When a SAFE converts, you have to calculate what price per share it will convert at, because that will determine the number of shares and resulting ownership percentage that the SAFE converts into. A Valuation Cap is one way to calculate the conversion price per share in a SAFE. To calculate the conversion price per share using a Valuation Cap, you take the Valuation Cap number (it is always a dollar amount), and divide that by the number of shares that make up the "Company Capitalization." This gives you a $/share number, which ends up being the Valuation Cap conversion price. Where pre-money and post-money SAFEs differ, is in how they define Company Capitalization.
What is a Pre-Money SAFE?
A Pre-Money SAFE means that, when a SAFE converts based on the valuation cap, it calculates the conversion price per share based on the Company Capitalization EXCLUDING shares issuable to convertibles (SAFE + convertible notes). So any shares issuable to convertible holders will not count towards Company Capitalization, and thus have no impact on the conversion price. In other words, the Valuation Cap calculates conversion price per share "pre-money" to the SAFEs. As a result, each convertible technically gets diluted by all the other convertibles, and they all come in on TOP of, or after, the Valuation Cap. This is great for the founders, less desirable for investors.
Summary of Post-Money SAFE
In contrast to the pre-money SAFE, with a post-money SAFE you calculate the SAFE's conversion price per share based on the Company Capitalization INCLUDING shares issuable to convertible (SAFE + convertible note) holders. So however many shares are issuable to convertible holders are counted as being included under the Valuation Cap, so they push the pre-SAFE ownership percentages down without diluting the SAFE's ultimate ownership. This is great for the investor because they will know exactly how much of the company they will own post conversion.
One thing to keep in mind with a Post-Money SAFE, is that the more money you raise through convertibles (such as SAFEs), you will basically be diluting only the founding team. For this reason, many founders prefer to do a pre-money SAFE if they can.
Which YC Template Should I be Using for my SAFE?
Although the original 2013 YC SAFE templates were pre-money, you could easily edit them to make them into post-money SAFEs. And similarly with the 2018 YC SAFE templates: although they are coded as post-money SAFEs, it is a very simple matter to convert it into a pre-money SAFE. In other words, when you say you want a pre-money SAFE, it doesn't mean you have to use the 2013 YC templates; you can still achieve that with the most recent 2018 drafts, but you will have to update a few key provisions within the document. We typically recommend that everyone use the more recent 2018 YC templates as their starting point, and then modify them to achieve pre-money terms, because there are a few other terms in the updated SAFE templates that are different (and better) from the 2013 YC templates, terms that have nothing to do with pre-money/post-money. To reiterate, picking pre-money over post-money doesn't mean that you have to use the 2013 YC templates instead of the 2018, but if you use the YC 2018 templates you will have to make sure you edit them to reflect the pre-money revision.
If you are planning on doing a SAFE financing, you can access an automated workflow on Savvi for generating and signing term sheets, board consents, and SAFE documents, whether you are looking to do a pre-money SAFE or a post-money SAFE.
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