How to dilute less in SAFE rounds?
𝐏𝐫𝐞-𝐌𝐨𝐧𝐞𝐲 𝐯𝐬 𝐏𝐨𝐬𝐭-𝐌𝐨𝐧𝐞𝐲 𝐒𝐀𝐅𝐄
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After I met with three pre-seed founders last week who were confused about their cap table projections, I realized we need to talk about something critical that's often misunderstood: SAFE notes and their long-term impact on your company.
Nearly 85% of early-stage startups use SAFEs for fundraising, but my experience has shown me that fewer than 30% truly understand how these instruments affect their ownership down the line.
Let's change that today.
UNDERSTANDING SAFEs
If you've raised money in the last five years, you've likely used a SAFE (Simple Agreement for Future Equity). Created by Y Combinator in 2013 and updated significantly in 2018, these instruments have become the standard for early-stage fundraising.
But the difference between pre-money and post-money SAFEs can cost founders up to 15% additional dilution in later rounds.
Pre-Money vs. Post-Money: A Critical Distinction
Post-Money SAFEs: The "What You See Is What You Get" Approach
Think of post-money SAFEs like selling slices of a pizza where you know exactly how big each slice is:
When an investor gives you $500K on a $5M post-money cap:
It's like saying your whole pizza (company) is worth $5M after their money is added
Their $500K buys exactly 10% of your pizza (company)
No surprises - if they give you $500K for a $5M post-money pizza, they get 10% of it
The math is super simple: Money they give ÷ Total value = Percentage they own
If you raise multiple rounds using post-money SAFEs, the math stays clean and predictable. Each investor gets exactly the percentage that their investment amount divided by the post-money cap indicates. If you raise $1.2M on a $10M post-money cap, that's exactly 12% dilution. If you later raise another $800K at the same $10M post-money cap, that's exactly 8% more dilution.
Pre-Money SAFEs: The "Moving Target" Approach
Pre-money SAFEs are trickier - like trying to divide a pizza while people are still adding toppings:
With a $500K investment at a $5M pre-money cap:
Your company is valued at $5M before adding the investor's money
The percentage they'll own keeps changing as more investors join
If another investor comes in later, they'll dilute everyone (including earlier investors)
You won't know the final ownership percentages until you do a proper priced round (like Series A)
The mathematical reality is that when using pre-money SAFEs, each new investor dilutes not just the founders but also all previous SAFE investors. And when you eventually create an option pool (typically 10-15% of your company) during your priced round, that dilution hits everyone proportionally again.
This cascading dilution effect often results in founders giving away 30-50% more equity than they initially calculated. For example, what might initially look like a 15-16% dilution on paper can easily become a 22-25% actual dilution once all the math is properly calculated after conversion.
What makes this especially challenging is that most cap table calculations for pre-money SAFEs are deceptively simple at first glance, hiding the complexity that will emerge later. By contrast, post-money SAFE calculations remain consistent from day one through conversion.
Guys, if you are a VC or fund or provide services for startups in the space of fundraising, please email me your details at bhowmiksayanee1050@gmail.com & we will connect to explore synergies. Cheers!
HOW YOUR OWNERSHIP ERODES
Post-Money SAFEs: The "What You See Is What You Get" Approach
Think of post-money SAFEs like selling slices of a pizza where you know exactly how big each slice is:
When an investor gives you $500K on a $5M post-money cap:
It's like saying your whole pizza (company) is worth $5M after their money is added
Their $500K buys exactly 10% of your pizza (company)
No surprises - if they give you $500K for a $5M post-money pizza, they get 10% of it
The math is super simple: Money they give ÷ Total value = Percentage they own
If you raise multiple rounds using post-money SAFEs, the math stays clean and predictable. Each investor gets exactly the percentage that their investment amount divided by the post-money cap indicates. If you raise $1.2M on a $10M post-money cap, that's exactly 12% dilution. If you later raise another $800K at the same $10M post-money cap, that's exactly 8% more dilution.
Pre-Money SAFEs: The "Moving Target" Approach
Pre-money SAFEs are trickier - like trying to divide a pizza while people are still adding toppings:
With a $500K investment at a $5M pre-money cap:
Your company is valued at $5M before adding the investor's money
The percentage they'll own keeps changing as more investors join
If another investor comes in later, they'll dilute everyone (including earlier investors)
You won't know the final ownership percentages until you do a proper priced round (like Series A)
The mathematical reality is that when using pre-money SAFEs, each new investor dilutes not just the founders but also all previous SAFE investors. And when you eventually create an option pool (typically 10-15% of your company) during your priced round, that dilution hits everyone proportionally again.
This cascading dilution effect often results in founders giving away 30-50% more equity than they initially calculated. For example, what might initially look like 15-16% dilution on paper can easily become 22-25% actual dilution once all the math is properly calculated after conversion.
What makes this especially challenging is that most cap table calculations for pre-money SAFEs are deceptively simple at first glance, hiding the complexity that will emerge later. By contrast, post-money SAFE calculations remain consistent from day one through conversion.
THE ROUND-HOPPING DANGER ZONE
Something I've observed repeatedly as both a VC and now as a mentor: founders who raise multiple bridges without product-market fit.
I call this the "round-hopping syndrome" - where founders become more focused on fundraising theater than building sustainable businesses.
A concerning trend from 2023-2024 data shows that 38% of seed-stage companies raise 2+ bridge rounds before Series A, but only 22% of those companies achieve the metrics necessary to justify their next valuations.
My advice: Each round should achieve specific milestones that demonstrably increase your company's value. Don't use financial engineering to create the illusion of progress.
💡 PRO RATA RIGHTS: THE HIDDEN STRATEGIC LEVER
In pre-money SAFEs, pro rata rights were baked in. With post-money SAFEs, they're handled separately through side letters.
Why does this matter?
Pro rata rights allow early investors to maintain their ownership percentage in future rounds. For founders, this means:
Better investor alignment - Investors with pro rata rights are incentivized to help you succeed and raise at higher valuations
Potential reduction in future fundraising stress - Up to 25% of your future rounds can be filled by existing investors
Strategic allocation - You can negotiate pro rata rights selectively with value-add investors
According to First Republic's latest investor survey, investors with pro rata rights are 3.4x more likely to make introductions to follow-on investors and provide strategic guidance between rounds.
MODELING YOUR CAP TABLE
Before signing any SAFE, run a detailed cap table model that projects through at least your Series A.
Key scenarios to model:
Best case: Quick growth, large A round at high valuation
Expected case: Normal timeline and valuation progression
Worst case: Additional bridge rounds, flat or down A round
WHAT INVESTORS REALLY THINK ABOUT YOUR CAP TABLE
Here's the unfiltered truth from my years on the other side of the table:
When evaluating startups for investment, VCs immediately look at:
How much capital has been raised relative to progress (capital efficiency)
How founder ownership has been preserved (negotiation skills)
Who else is on the cap table (network strength)
Red flags that make VCs hesitate:
Founder ownership below 50% pre-Series A (suggests poor planning)
Multiple notes with varying terms (creates messy conversion scenarios)
Cap table with no room for new option pools (talent acquisition challenges)
From my partner conversations at three VC firms last quarter, I know that companies with clean cap tables receive term sheets 2.7x faster than those requiring complicated cleanup during diligence.
FINAL THOUGHTS
SAFEs were designed to make fundraising easier, but they've introduced complexity that requires founders to be more financially sophisticated.
My three rules for SAFE fundraising:
Know your numbers - Understand exactly how each investment affects your ownership
Model all scenarios - Use tools to visualize multiple conversion outcomes
Optimize for the long game - Sometimes taking less money at better terms preserves more value
Note that the best founders are those who understand their cap table as well as their product roadmap.
P.S. Don't forget about the investor list giveaway! Get 3 friends to subscribe, and you'll receive my curated database of investors actively writing checks in today's market, complete with their investment theses and preferred outreach methods.
Until next time, signing off
Sayanee Bhowmik
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That is very insightful!