What a SAFE is
A SAFE is a financing instrument that usually converts into equity in a future priced round. In practice, the hard part is not the acronym; it is understanding which price applies, how the document defines dilution, and how conversion changes ownership across the cap table.
Cap vs discount (intuition)
- Valuation cap: sets a maximum valuation used for conversion, producing a lower conversion price if the priced round valuation is high.
- Discount: converts at a percentage off the priced round price per share (e.g., 20% discount).
- Many SAFEs convert at the better (lower price) of cap or discount (terms vary).
How to model conversion (simplified)
- Compute the priced round price per share = pre-money / fully diluted shares.
- Compute cap price per share = cap / fully diluted shares (if applicable).
- Compute discount price per share = round price * (1 - discount).
- Convert SAFE amount into shares at the lowest applicable conversion price.
What to verify in the SAFE
- Is the SAFE pre-money or post-money (dilution mechanics differ)-
- Does it include a cap, a discount, or both-
- What counts as a qualified financing and what is the conversion trigger-
- How are pro-rata rights handled, if any-
Common mistakes
- Using shares that are not fully diluted (forgetting option pool and other convertibles).
- Mixing post-money SAFE mechanics with pre-money modeling assumptions.
- Treating the model as legal truth (always reconcile to the SAFE documents).