SAFEs, convertible notes and your cap table

Early-stage companies often raise money on SAFEs (simple agreements for future equity) or convertible notes before they set a formal valuation. These instruments are quick to agree, but because they convert later, their effect on ownership is easy to underestimate.

How they work

An investor pays money now. Instead of receiving shares straight away, the investor receives the right to shares when a later priced equity round happens. A convertible note is similar but is structured as debt, usually with interest and a maturity date. In India, instruments such as compulsorily convertible preference shares (CCPS) and convertible notes for eligible startups follow their own legal rules, so the documents need to be reviewed in that context.

The terms that decide ownership

• Valuation cap: the highest company valuation used to calculate the investor’s conversion price.
• Discount: a percentage reduction on the price paid by new investors in the priced round.
• Pre-money or post-money basis: whether the cap is measured before or after the SAFE money itself, which changes the result.
• Interest, for convertible notes, which usually converts into extra shares.

Where both a cap and a discount apply, the investor usually converts at whichever gives the lower price per share, and therefore more shares.

Why dilution surprises founders

Several SAFEs signed months apart all convert at the same moment: the priced round. At that point the founders are diluted by the new investors and by every SAFE at once. If the SAFEs were on a post-money basis, the dilution from them is fixed regardless of later rounds, which protects the SAFE holder but can leave founders with less than expected.

Model the conversion before you sign the next SAFE, not when the term sheet arrives.

How to model it

• List every outstanding SAFE and note with its amount, cap, discount and basis.
• Set up the expected priced round: pre-money valuation, new money and option pool top-up.
• Calculate each instrument’s conversion price and the shares it receives.
• Show the fully diluted cap table before and after the round, for founders, investors, SAFEs and the option pool.
• Run a few scenarios at different valuations to see how ownership moves.

Keep the cap table current

Update the cap table every time a SAFE, note, option grant or share issue is signed. A clean, reconciled cap table makes due diligence faster and avoids awkward discoveries during a raise.