A Corrected “Safe for Founders” Post-Money SAFE

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2023-01-23 05:30:04

As we’ve written previously, the Post-Money SAFE template published by Y Combinator has dramatically worse economics for founders and common stockholders than it should, but it has been getting lots of promotion from the investor community because of how favorable it is to them.

To help, we’ve published a very easy-to-understand redline of the Post-Money SAFE that “fixes” the most impactful economics problem in the Post-Money SAFE: the fact that any subsequently issued SAFEs or convertible notes dilute only the common stock and not investors. Many, many founders are getting tricked/duped into signing these documents without fully understanding how that grossly investor-favorable anti-dilution mechanism hurts their cap table.

The only substantive modification in this redline, in track changes (so the edit is transparent), is the clarification that the Post-Money Cap’s denominator includes convertible securities only as of the closing of this particular SAFE financing. Any subsequently issued convertibles dilute everyone on the cap table, as they should. As a result, investors can be confident that they are getting about X% of the cap table as of today, which was the stated logic of post-money SAFEs to begin with, but there is alignment between common and investors as it relates to post-closing dilution.