I am not opposed to SAFEs. They can be a very effective instrument for raising seed capital quickly and efficiently. But founders should understand how post-money SAFEs work, because they can create dilution consequences that are much more significant than many companies initially expect.
Under a post-money SAFE, the investor’s ownership percentage is effectively fixed based on the post-money valuation cap. For example, if a company raises $1 million on a $10 million post-money cap, those investors are effectively buying 10% of the company. The key point is that this percentage is locked in economically. In practical terms, those investors are protected against dilution from later SAFE rounds in a way that can be very founder-unfriendly.
For example, suppose the company later raises another SAFE round at a $20 million post-money cap and brings in $2 million. That new round would account for another 10% of the company. But the first SAFE investors are still entitled to their original 10%. In other words, the earlier SAFE holders are not diluted by the later SAFE financing in the same way founders typically expect. The dilution instead accumulates heavily against the founders and other existing holders.
This can make post-money SAFEs far more expensive in equity terms than they appear at first glance. A company may save legal fees by postponing a conversion into preferred stock, but that short-term savings can result in meaningfully greater dilution.
A more disciplined approach is often to raise an initial SAFE round, then convert it into a priced seed preferred round—such as a Series Seed financing—before issuing more SAFEs. Once the preferred stock structure is in place, it is often more efficient and transparent to continue issuing equity rather than stacking additional convertible instruments on top of one another.
Bottom Line
SAFEs are useful, but post-money SAFEs can be deceptively dilutive. Founders should pay close attention to how much ownership they are giving away and consider converting early SAFE rounds into seed preferred stock rather than continuing to stack new notes or SAFEs.