SAFE Calculator

What are SAFE agreements?

Simple Agreements for Future Equity (SAFE) notes are a type of convertible security that is typically issued in funding rounds of early-stage startups. In these agreements, the investor makes a lump sum investment in the early-stage startup and receives the right to receive equity later on, typically at a future funding round. In the future funding round, the SAFE investors can convert their SAFE notes into common stock at a discounted price or valuation cap.

Let us explain how SAFEs offer favorable terms to early investors in exchange for taking on higher risk. Suppose you invest $100,000 in a startup under a SAFE agreement with a valuation cap of $2.5 million or a 20% discount on the next funding round’s share price, whichever is more favorable to the SAFE investor.

A year later, the startup raised $1 million at a pre-money valuation of $4 million and a post-money valuation of $5 million. In this round, 200,000 shares were issued at a share price of $5. Prior to this round, the total shares issued were 1 million, and the total issued and outstanding options were 40,000.

Now, let’s calculate how many shares you would receive: Since the valuation cap results in more shares, your SAFE investment will be converted using the valuation cap. Without a valuation cap or discount, your investment would have only yielded 25,000 shares at the share price of $4. In contrast, the valuation cap results in a much cheaper share price of approximately $2.40.

Why use SAFE notes?

As we mentioned earlier, SAFE notes are typically issued by early-stage startups. At the pre-seed or seed stage, ascertaining a startup’s valuation can be nearly impossible.

Most startups have not moved beyond the ideation and prototype phase when they raise funds in the pre-seed or seed stages. As a result, estimating the future cash flows and deriving accurate valuations for such startups is extremely challenging.

To circumvent this issue, startups use SAFE agreements, allowing investors to convert their investment into common stock at a later funding round. In return for taking on higher risk, investors receive additional shares through either a valuation cap or a discount, whichever provides more shares.

Important terms to know

To understand the nature of SAFE notes being offered to you and how they would convert into common stock, you must understand the following terms.

Valuation cap

Valuation cap is the maximum valuation at which SAFE notes can be converted into common stock. For instance, if you invest $100,000 in a SAFE with a $1 million valuation cap, you are guaranteed at least 10% ownership ($100,000 ÷ $1 million) in the future funding round, regardless of the actual valuation.

Discount rate

In SAFE notes, discount rates reduce the conversion price and thereby increase the number of shares received by the investor. In the above mentioned example, we saw how a discount of 20% increased the number of shares from 100,000 to 125,000.

Pre-money and post-money valuations

The pre-money valuation, and not the post-money valuation, is used to determine whether the valuation cap is applicable.

Consider this scenario:

• SAFE investment amount = $400,000
• Valuation cap = $4 million
• Discount rate = 20%
• Pre-money valuation = $3 million
• Funds raised = $1 million
• Post-money valuation = $4 million
• Shares issued to new investor = 100,000

Since the pre-money valuation is less than the valuation cap, the valuation cap is not applicable. Instead, we will use the discounted conversion price, which will be calculated in the following manner.

Discounted conversion price = (Funding round share price) × (1 – Discount rate) = (Funds raised ÷ Shares issued to new investor) × (1 – Discount rate)
= ($3 million ÷ 100,000) × (1-20%) = $30 × 80% = $24

Thus, the number of shares issued to the SAFE investor would be = $400,000 ÷ $24 ≈ 16,667 shares

Investment amount

The investment amount in the original SAFE investment forms the basis for calculating the number of shares issued to the SAFE investor. When the valuation cap is applicable, the ownership percentage is calculated by dividing the investment amount by the valuation cap. When the discount rate is applicable, the investment amount divided by the adjusted price determines the number of shares.

Total round raised

The total round raised is the total capital the startup secures in the funding round. In the context of SAFE conversion calculations, we can subtract the total round raised from the post-money valuation to find the pre-money valuation, if that is not explicitly stated.

How does the SAFE agreement calculator work for different funding rounds?

Our SAFE agreement calculator has the flexibility to deal with various funding round scenarios. Investors and startup founders can enter any expected valuations to determine whether valuation caps apply and how the conversion price is calculated. Additionally, when provided with the number of outstanding shares, the calculator will display the number of shares issued to the SAFE investor as well as their ownership stake. This ensures a clear understanding of how SAFE notes impact the cap table and overall equity distribution.

Our SAFE calculator requires the following details:

• Investment amount
• Discount rate
• Valuation cap
• Pre-money valuation
• Total fully diluted shares

In most SAFE agreements, the conversion is made based on the discount rate or the valuation cap, whichever fetches the most shares. However, as veterans of the venture capital industry, we know that this may not always be the case.

Hence, our calculator will show you the SAFE conversion through both routes.

Let us take an example where you invest $250,000 through SAFE notes with a valuation cap of $4 million and a discount rate of 20%. At this point, the startup had 1,500,000 total fully diluted shares.

Suppose a year later the startup raised $1 million at a share price of $4 and a pre-money valuation of $5 million.

Conversion through valuation cap

Shares received by SAFE investor = Investment amount ÷ (Valuation cap ÷ Company’s total pre-money capitalization)
= $250,000 ÷ ($4 million ÷ 1,500,000) = $250,000 ÷ $2.67 = 93,750 shares

Conversion through discount rate

Shares received by SAFE investor = Investment amount ÷ [Share price × (1 – Discount rate)]
= $250,000 ÷ [$4 × (1 – 20%)] = $250,000 ÷ $3.2 = 78,125 shares

FAQs

Some common queries about SAFE notes are as follows.

What is a valuation cap in a SAFE agreement?

The valuation cap is the maximum valuation at which SAFE notes can be converted into common stock. It allows early-stage investors to secure a minimum ownership percentage.

How does the discount rate affect equity conversion?

In SAFE note conversions, the conversion price is calculated by applying the discount rate to the funding round share price.

What if my SAFE has both a valuation cap and discount rate?

If your SAFE has both a valuation cap and a discount rate, the conversion route that provides more shares to the investor will be applied, unless specified otherwise.

Issue and manage your SAFE notes on Eqvista!

Startups issue various forms of complex securities such as SAFE notes to meet investor needs and sidestep issues in determining valuations. While this approach helps secure funds, it can also complicate equity management. Each convertible security will provide different benefits and will have a unique impact on the ownership structure. In such a scenario, in order to ensure fair exits and compensation, and smooth decision-making, equity management is vital.

With Eqvista, you can seamlessly issue equity, track ownership, make proposals to your board, and visualize various funding round scenarios. Thus, our platform enables you to scale your startup with clarity. Contact us to learn more about our platform!