The scenario. Over 18 months a founder has raised $2.5 million across six SAFEs and one convertible note. The valuation caps range from $5 million to $12 million. The note has a 5% rate and an 18-month maturity. A lead investor has now offered $4 million at $15 million pre-money for a Series Seed. Time to convert.
The conversion math, in plain English
Each Post-Money SAFE converts into Series Seed Preferred at the lower of (a) the SAFE’s valuation cap or (b) the Series Seed price minus the SAFE’s discount (if any). Because all six SAFE caps ($5M, $5M, $7M, $9M, $9M, $12M) are below the $15M Series Seed price, every SAFE converts at its cap. Each SAFE holder receives more shares per dollar than the Series Seed investors do — the reward for early belief.
The convertible note works the same way except the principal accrues interest. At conversion, the accrued interest converts into additional shares at the same cap-or-discount mechanic. Eighteen months of 5% interest on a $250,000 note is about $19,000 of additional shares.
The post-money trap
Post-money SAFEs are dilution-shifting: the SAFE-holder’s ownership percentage of the post-conversion cap table is fixed regardless of how many other SAFEs the company sells. That means EVERY new SAFE the company sells before the priced round dilutes the founders (and the previous SAFEs) further. A founder who sells $250,000 of SAFEs in March at a $5M cap and another $250,000 in October at a $10M cap is more diluted than a founder who sold $500,000 in March at the same $5M cap.
This is why post-money SAFEs reward founders for raising bigger, fewer rounds and punish founders who dribble in capital. Model the dilution before signing each new SAFE.
MFN, pro rata, and the side letter problem
Three of the SAFE holders have Investor Side Letters with MFN clauses — they automatically receive the most favorable terms granted to any subsequent investor. If you granted a $7M cap to an investor in June but later granted a $5M cap to a different investor in September, your June investor’s SAFE retroactively becomes a $5M cap. Track this carefully — it is a common source of cap-table surprises.
Pro-rata rights mean the relevant SAFE holders also get to invest in the Series Seed alongside the lead. Reserve space for this in the round size.
The option pool refresh
The lead investor will typically require the option pool to be expanded to 10–15% of post-money shares, with the expansion coming out of the founders’ equity (the “pool shuffle”). Model the pool refresh, the SAFE conversions, and the new investor dollars TOGETHER — the founders’ final ownership percentage is sensitive to the order in which you do the math.
What the founder should walk into the close with
- A pro forma cap table modeling pre-money, SAFE conversions, note conversion (with interest), Series Seed dollars in, and the option pool refresh.
- A signature page binder for every SAFE holder so the company can deliver the converted shares promptly.
- Settled MFN positions on every side letter, in writing.
- A communication to all SAFE holders explaining the conversion mechanic before the close.
Founders who walk into the Series Seed close with a clean cap-table model close in days. Founders who do not spend weeks fielding investor questions and discovering surprises.
Talk to a Florida Business Lawyer
If you are navigating a scenario like this one, schedule a consultation with Montague Law at 904-234-5653 or use the contact form. The firm represents founders, investors, and business owners statewide and nationally from offices in Fernandina Beach and Coral Gables (Miami).
Templates and resources referenced
This case study is a composite illustration drawn from common founder scenarios. It does not describe any specific client or matter and is provided for general informational purposes only. It is not legal, tax, or financial advice and does not create an attorney-client relationship. Consult counsel for guidance tailored to your specific facts.
