Pre-money vs. post-money SAFEs

Issuing a SAFE (Simple Agreement for Future Equity) usually requires less paperwork and negotiation than issuing shares. However, understanding how SAFEs work can be overwhelming for many founders – especially when it comes to pre-money versus post-money SAFEs.

This article explains the differences between SAFEs issued pre-money and post-money to help you fundraise with confidence.

Pre-money vs. post-money SAFEs

The most common mistake founders make with SAFEs

One of the biggest mistakes early-stage founders make is assuming that pre-money and post-money SAFEs are interchangeable. When negotiating an investment deal, they focus on details like valuation caps and conversion discounts first, and then let investors decide whether the SAFE is going to be pre-money or post-money. 

In fact,there’s a big difference between the two. While a post-money SAFE sets a fixed ownership percentage for the investor, a pre-money SAFE does not. As a result, the decision to use either a pre- or post-money SAFE can have a significant impact on the founder’s ownership percentage and share dilution over time. 

So, when you’re preparing to fundraise, it’s sensible to  decide whether to use pre-money or post-money SAFEs before you close the round, and then discuss other details like valuation caps and conversion discounts with investors.

How pre-money SAFEs work

Let’s say you’re raising a seed round. Your company doesn’t have an official valuation at this stage, so you accept money from several investors through SAFEs. Instead of issuing actual shares, you’re giving those investors an opportunity to subscribe to company shares at a later date. 

Existing SAFE investments typically convert into equity – and usually preferred shares – during the first priced round, such as a Series A.

Pre-money SAFEs: the investor’s perspective

Imagine for a moment that you’re one of those investors. While you know you’ll receive equity at some point in the future, this investment carries a fair amount of uncertainty. With a pre-money SAFE, it’s difficult to assess what percentage of the company you own compared to the founding team and all the other SAFE investors in that funding round.

The only way to see how equity will be distributed between founders and investors is  to wait until the company raises its first priced round. This qualifying event will trigger the conversion of your SAFEs into shares, along with the other investors’ agreements. When the dust settles, everyone will finally know what percentage of the company they own.

In short, fundraising with pre-money SAFEs means that neither founders nor investors will know how their ownership percentage compares with other stakeholders until a future funding round. This is the key difference between pre- and post-money SAFEs.

How post-money SAFEs work

If an investor provides funding in exchange for a post-money SAFE, this effectively locks in the percentage of your company they’ll own when the agreement converts into shares.

Let’s say an investor gives you £1 million and you issue a post-money SAFE with a valuation cap of £10 million. The valuation cap is the maximum price at which you’ll convert a SAFE into equity in the future.

£1 million investment / £10 million valuation cap = 10%

As the investor holds a post-money SAFE they’re guaranteed a 10% ownership stake in your company when their SAFE converts into shares during the next priced round.

This scenario is appealing for investors because it gives them a lot of clarity compared to the uncertainty of a pre-money SAFE. However, there’s another element that founders should keep in mind: dilution.

The catch with post-money SAFEs

As a founder, post-money SAFEs put you at greater risk of having your ownership stake diluted in the future (i.e. when you raise your first priced round).

Each investor with a post-money SAFE will own a fixed percentage of your company,, no matter how many other SAFE investors are involved in the round.

This means that when your Series A funding round begins, none of the SAFE investors will dilute each other’s ownership percentages. Instead, they’ll only dilute your stake as a founder.

Why investors typically prefer the post-money SAFE

Naturally, investors tend to favour a post-money SAFE. While it doesn’t offer total certainty, it’s more predictable than a pre-money SAFE. If the valuation cap on their SAFE amounts to 5%, they know they’ll own 5% of the company at the moment their instrument converts.

Post-money SAFEs have benefits for founders, too. Depending on your circumstances, it can be helpful to know exactly what percentage of your company you’re giving away at an early stage. It also makes negotiating with investors faster, simpler and more transparent.

Convertible securities calculator

Carta’s free convertible securities calculator allows founders to model an unpriced funding round with SAFEs, convertible loan notes (CLNs) or Advance Subscription Agreements (ASAs). You can use the tool to explore different funding scenarios for your company before negotiating with investors.