In the third quarter of 2024, about 88% of pre-priced rounds were Simple Agreements for Future Equity (SAFEs). SAFEs are contracts between founders and investors that accelerate early fundraising by giving investors the right to receive equity in the business later in exchange for funding now. A SAFE conversion is the point at which a SAFE turns into shares. The conversion sets ownership percentages, triggers dilution, and solidifies outcomes negotiated long before any priced round existed.

Below, we’ll discuss how SAFE conversions work, when they happen, and how they affect ownership when a SAFE becomes real equity.

What's in this article?

• What is SAFE conversion, and when does it happen?
  
• How does SAFE conversion work in a priced equity round?
  
• What are the differences between pre-money and post-money SAFE conversions?
  
• How do valuation caps affect SAFE conversion outcomes?
  
• How does SAFE conversion affect founder dilution and ownership?
  
• How Stripe Atlas can help
  

What is SAFE conversion, and when does it happen?

SAFE conversion occurs when a SAFE takes effect and confers ownership. Until the conversion, the investor doesn’t own stock, have voting rights, or appear on the cap table as a shareholder.

A SAFE converts only when a specific event occurs. Until then, it remains unconverted no matter how much time passes. Here’s what spurs conversion:

A priced equity round

A priced equity round is a common SAFE conversion trigger. This is often a seed or Series A round in which investors buy shares at a fixed valuation. When that round closes, all outstanding SAFEs convert automatically into equity at a price determined by their terms.

This is the expected outcome for SAFEs: early capital becomes stock once the business has a market-backed price.

A liquidity event

If the business is acquired or goes public before a priced round happens, SAFEs can also convert. Though the exact outcome depends on the SAFE’s language, investors might be given a choice between converting into shares (often using the valuation cap, which is a stated maximum valuation at which SAFE investors’ money converts into equity) or recouping their original investment. In strong exits, conversion is typically the better outcome; in modest ones, repayment might be.

SAFEs do not mature, expire, or force conversion over time. If a business keeps operating without raising a priced round, the SAFE can remain outstanding indefinitely. If the business closes without a liquidity event, SAFE holders might be entitled to repayment after creditors, depending on the SAFE. Often, though, nothing is left to distribute.

How does SAFE conversion work in a priced equity round?

A SAFE is intended to become equity in a priced round. During a seed or Series A round in which investors buy shares, SAFEs also automatically convert.

Here's how it works:

• The priced round establishes the share price: The business and additional, non-SAFE investors agree on a valuation and a fixed price per share. These become the reference points for SAFE conversions.

• Each SAFE converts automatically: The conversion is typically triggered by financing and happens as part of the closing.

• Discounts and valuation caps determine the conversion price: If a SAFE has a discount, the SAFE investor converts at a lower price than new investors do. If the SAFE has a valuation cap and the price round exceeds that figure, the price is calculated for SAFE holders as though the business were valued at the cap rather than at the priced-round valuation. When a SAFE includes a discount and a valuation cap, the investor converts using whichever produces the lower price per share.

• Shares are issued based on simple maths: To calculate how many shares an investor receives, their SAFE investment amount is divided by the conversion price above.

• Converted SAFEs become equity: When shares are issued, the SAFE is replaced by stock, which typically comes with the same economic rights as the new round’s shares.

• SAFEs convert on their own terms: If multiple SAFEs are in place, a priced equity round triggers them all at the same time. But each SAFE converts independently based on its own terms, which means earlier SAFEs with lower caps often receive more equity than later ones do.

• Ownership shifts without changing the round valuation: SAFE conversion doesn’t affect the headline valuation of the financing, but it does directly affect how ownership is distributed among founders and investors.

What are the differences between pre-money and post-money SAFE conversions?

SAFEs can be pre-money or post-money. These types have different conversion calculations, and they also determine how predictable ownership is.

Pre-money SAFEs

• Calculate conversion before SAFE capital is included: With pre-money SAFEs, the business’s valuation at conversion does not include the money raised through SAFEs. This means SAFEs effectively dilute each other when they convert.

• Make ownership outcomes more difficult to predict: Because each pre-money SAFE assumes it is converting into the same pre-money cap table, the final ownership percentages depend on how many other SAFEs exist. Often, founders don’t know exactly how much equity they’ve sold until conversion occurs.

Post-money SAFEs

• Include SAFE capital in the conversion maths: The valuation used for conversion in post-money SAFEs includes the SAFE investment, which is treated as a defined slice of the business.

• Lock in fixed ownership percentages: With post-money SAFEs, the investor’s ownership is roughly equal to the SAFE amount divided by the post-money valuation cap. This is true regardless of how many other SAFEs exist.

• Shift dilution to founders, not other SAFE holders: Post-money SAFEs no longer dilute each other at conversion. Instead, all dilution flows directly to existing shareholders.

• Provide more clarity long term: Pre-money SAFEs can feel more founder-friendly in aggregate, but post-money SAFEs make dilution more transparent and measurable from the beginning.

How do valuation caps affect SAFE conversion outcomes?

Before conversion occurs, it’s impossible to know for sure how much equity a SAFE will become. But valuation caps are an important determining factor.

Remember these factors:

• A valuation cap sets a maximum conversion valuation: If the priced round values the business above the valuation cap, the SAFE converts as if the business were worth only the capped amount.

• Lower caps produce more equity for SAFE investors: A lower cap means a lower effective price per share at conversion, which increases the number of shares the investor receives.

• Caps protect early investors from extreme valuation growth: The cap ensures that if the business’s valuation rises sharply before the next round, early capital isn’t diluted away.

• Multiple capped SAFEs compound dilution: When several SAFEs with different caps convert together, lower-cap SAFEs receive disproportionately more equity, which increases the dilution impact on founders and later investors.

• Caps override discounts when they are more favourable: If a discount and a valuation cap exist, the SAFE converts using whichever results in the lower share price. In fast-growing businesses, the cap is likely to win.

• Cap selection is a strategic decision: Setting a cap too low can give away far more equity than intended if the business performs well. Setting it too high can make the SAFE unattractive to investors.

How does SAFE conversion affect founder dilution and ownership?

SAFE conversion is where dilution shows up. Though the ownership was effectively sold earlier, SAFEs don’t appear as equity on the cap table until conversion, which can leave founders feeling surprised.

Here's what to expect:

• SAFE conversion issues new shares: When SAFEs convert, the business creates new equity for SAFE investors, which reduces the ownership percentage for existing shareholders.

• Pre-money SAFEs spread dilution across SAFE holders: Because pre-money SAFEs dilute one another, founders might experience slightly less dilution overall, but the outcome is more difficult to predict.

• Post-money SAFEs augment dilution: Each post-money SAFE represents a fixed slice of the business. Multiple SAFEs stack on each other, and that dilution comes out of the founders’ ownership.

• SAFE dilution compounds with the priced round: In addition to SAFE conversion, new investors often receive a large ownership stake. Option pool increases might further dilute founders.

Planning is the only real protection. Modelling SAFE conversion scenarios before raising capital helps founders understand how much of the business they’re truly giving up and avoid surprises when equity is finally issued.

How Stripe Atlas can help

Stripe Atlas sets up your company’s legal foundations so you can fundraise with SAFEs, open a bank account, and accept payments within two business days from anywhere in the world.

Join 100K+ companies incorporated using Atlas, including startups backed by top investors like Y Combinator, a16z, and General Catalyst.

Applying to Atlas

Applying to form a company with Atlas takes less than 10 minutes. You'll choose your company structure, instantly confirm whether your company name is available and add up to four co-founders. You'll also decide how to split equity, reserve a pool of equity for future investors and employees, appoint officers and then e-sign all your documents. Any co-founders will receive emails inviting them to e-sign their documents, too.

Fundraising with SAFEs

After incorporating your C corporation (C corp), Atlas helps you obtain board approval to fundraise and send SAFEs to investors. After signing a SAFE, your investors can transfer funds to the bank account of your choice.

Accepting payments and banking before your EIN arrives

After forming your company, Atlas files for your Employer Identification Number (EIN). Founders with a US Social Security number, address and mobile phone number are eligible for IRS expedited processing, whilst others will receive standard processing, which can take a little longer. Additionally, Atlas enables pre-EIN payments and banking, so you can start accepting payments and making transactions before your EIN arrives.

Cashless founder stock purchase

Founders can purchase initial shares using their intellectual property (IP) (e.g. copyrights or patents) instead of cash, with proof of purchase stored in your Atlas Dashboard. Your IP must be valued at $100 or less to use this feature; if you own IP above that value, consult a lawyer before proceeding.

Automatic 83(b) tax election filing

Founders can file an 83(b) tax election to reduce personal income taxes. Atlas will file it for you – whether you are a US or non-US founder – with USPS Certified Mail and tracking. You'll receive a signed 83(b) election and proof of filing directly in the Stripe Dashboard.

World-class company legal documents

Atlas provides all the legal documents you need to start running your company. Atlas C corp documents are built in collaboration with Cooley, one of the world's leading venture capital law firms. These documents are designed to help you fundraise immediately and ensure your company is legally protected, covering aspects like ownership structure, equity distribution and tax compliance.

$50K in partner credits and discounts

Atlas collaborates with top-tier partners to give founders exclusive discounts and credits. These include discounts on essential tools for engineering, tax, finance, compliance and operations from industry leaders like AWS, Carta and Perplexity. We also provide you with your required Delaware registered agent for free in your first year. Plus, as an Atlas user, you'll access additional Stripe benefits, including up to a year of free payment processing for up to $100K in payments volume.

Learn more about how Atlas can help you set up your new business quickly and easily and get started today.