SAFE Conversion Math: Caps, Discounts and the Pool Shuffle

Worked example

These values come from the default stack: 8,000,000 founder shares, a $150k post money SAFE at a $5M cap, a $250k pre money SAFE at a $6M cap with a 20% discount, a $200k note at an $8M cap accruing 6%, converted into a $15M pre money Series A with $3M of new capital and a 10% pool.

Values produced by the default inputs
Founders before Series A	78.8%
Founders after the round	65.7%
Series A share price	$1.48
Series A ownership	16.7%
SAFEs and notes combined	7.7%post money 2.5%, pre money 3.2%, notes 2%
Option pool	10%costs founders $1,800,000 at the Series A price
Fully diluted shares	12.18M
Conversion solve	Converged in 2 passsolved as one linear system

The formulas

Solving the whole stack at once

Everything is expressed in shares immediately before Series A cash enters, written x.

01
Notes first accrue simple interest into their conversion principal.
$P_{i} = I_{i} (1 + a_{i} \cdot \frac{m _{i}}{12})$
02
A post money SAFE owns a fixed fraction of x.
$s_{i} = x \cdot \frac{I _{i}}{cap _{i}}$
03
Pre money SAFEs and notes price off the pre money capitalization including the pool.
$p_{i}^{cap} = \frac{cap _{i}}{F + pool}, p_{i}^{disc} = (1 - δ_{i}) \cdot \frac{V}{x}$
04
The investor takes whichever conversion price is lower.
$p_{i} = min (p_{i}^{cap}, p_{i}^{disc}), s_{i} = \frac{P _{i}}{p _{i}}$
05
The pool is a post closing target, so with k = q(1 + C/V) the pre Series A share count satisfies a single linear equation.
$x = F + k x + post \sum \frac{I _{i}}{cap _{i}} x + cap \sum \frac{P _{i} ( F + k x )}{cap _{i}} + disc \sum \frac{P _{i} x}{( 1 - δ _{i} ) V}$
06
Series A buys the same fraction of every company.
$p_{A} = \frac{V}{x}, A = \frac{C}{p _{A}}, Ownership_{j} = \frac{shares _{j}}{x + A}$

Result

Because each instrument binding branch is known, the system is linear and solved exactly. The iteration only has to converge on which branch binds.

x^{*} = \frac{F + \sum _{cap} \frac{P _{i} F}{cap _{i}}}{1 - k - \sum _{post} \frac{I _{i}}{cap _{i}} - \sum _{cap} \frac{P _{i} k}{cap _{i}} - \sum _{disc} \frac{P _{i}}{( 1 - δ _{i} ) V}}

Where F is founder shares, q the target pool percentage, C the new capital, V the pre money valuation and delta the instrument discount. The option pool is created pre money, so founders and pre money instruments absorb it while post money SAFE percentages stay fixed.

Assumptions and caveats

Post money SAFE percentages are fixedOwnership is investment divided by post money cap, measured immediately before Series A cash. The pool shuffle cannot dilute them.
Pre money SAFEs and notes share the poolTheir cap price uses founders plus pool as the capitalization base, excluding the converting instruments themselves. This is the conservative reading of a convention that varies between term sheets.
The pool is created pre moneyThe target is a post closing percentage of fully diluted stock. Because it exists before the new money arrives, existing holders pay for all of it.
Notes accrue simple interestInterest is simple, not compounded, and is added to principal at conversion. No prepayment or default interest is modelled.
No warrants, no multiple liquidation preferencesOnly SAFEs and notes are modelled here. Warrants and preference stacks change the exit waterfall, not the conversion, and are out of scope.
One priced round, one pool top upThe model converts every instrument once. A second round, bridge or recapitalization needs a fresh model.

Glossary

Post money SAFE: A simple agreement for future equity whose investor ownership is fixed at investment divided by post money cap. Cannot be diluted by later SAFEs or pool expansion, those costs land on founders.
Pre money SAFE: A SAFE that fixes a conversion price against the pre money valuation rather than a fixed ownership percentage, so the investor shares in subsequent pool dilution.
Convertible note: Debt that converts to equity at a later round. Accrues interest and usually has a maturity date, converting at the better of its cap or discount.
Valuation capalso: cap: The maximum effective valuation at which an instrument converts. A $5M cap on a $15M round means the investor buys at the $5M price.
Discount rate: A percentage off the next priced round share price. A 20% discount lets the instrument buy at 80% of the Series A price.
Option poolalso: ESOP: Shares reserved for future employees, usually expressed as a percentage of fully diluted stock. The unallocated portion is created pre money in a priced round.
Option pool shuffle: Creating the pool before new money enters so the incoming investor percentage is unaffected, pushing the full dilution onto existing holders.
Fully diluted shares: Every share that would exist if all options, warrants and convertible instruments were exercised. The only honest denominator for ownership percentages.
Cap table: The ledger of who owns what. Post round means after the new money and every conversion has been applied.

This model vs. the rule of thumb

Question	Standard rule of thumb	What this model does	Why it changes the answer
SAFE ownership	Investment divided by cap, applied on top	Solved against the pre Series A capitalization, including the pool	Percentage arithmetic applied sequentially drifts. Post money SAFE percentages are defined against a capitalization that includes the pool, so the pool and the SAFEs must be solved together.
Option pool	Added as a flat percentage of the round	Post closing target, created pre money, with its dollar cost quantified	A 10% pool is not 10% of the pre money company, it is 10% of the post closing total, and founders pay for all of it.
Notes	Treated as a SAFE at the same amount	Interest accrued into the conversion principal	A two year old note at 6% converts $212k of principal, not $200k. Ignoring accrual understates the dilution.
Cap versus discount	Cap only, or discount only	Effective price is the better of the two for the investor	The investor always gets the lower price. Modelling only one constraint misprices the conversion.
Founder risk	One headline ownership number	Governance thresholds flagged with the exact consequence	Falling below 51% changes what you can approve without a board vote. That is a structural event, not just a percentage.

Frequently asked questions

What is the difference between a post money SAFE and a pre money SAFE?

A post money SAFE fixes the investor ownership percentage at investment divided by the post money cap, measured immediately before the priced round. Because that percentage is fixed, later SAFEs and option pool expansions cannot dilute them, only founders and existing holders are diluted. A pre money SAFE instead fixes a conversion price off the pre money valuation, so the investor ultimate percentage depends on how much stock exists when the round closes, including any pool expansion.

What is the option pool shuffle?

The option pool shuffle is the practice of creating the post closing employee option pool before the new investor money enters, so it is included in the pre money capitalization. The new investor percentage is measured after the pool exists, which means founders absorb the entire dilution from the pool rather than sharing it with the incoming investor. This model applies the shuffle explicitly and reports its dollar cost at the Series A price.

How does the valuation cap interact with the discount?

The investor converts at whichever produces the lower price per share: the cap price or the discounted Series A price. That is the minimum in the effective price formula. A discount only matters when the round prices above the cap. If the cap is already below the round, the cap wins and the discount is irrelevant.

Why do convertible notes convert for more than the amount invested?

Notes accrue simple interest until conversion. A $200,000 note at 6% APR converting after 12 months becomes $212,000 of principal, and that larger number buys shares. Long lived notes at high rates can grow materially, which is why the model shows accrued interest separately from the original principal.

Why does my founder percentage not match a simple percentage calculation?

Because everything is solved simultaneously. Post money SAFE percentages depend on the pre Series A share count, which depends on the option pool, which depends on the fully diluted post money total, which includes the Series A shares, and the Series A share price depends on the pre money share count. This model solves that system exactly rather than approximating it with sequential percentage arithmetic, which is where most spreadsheets drift.

What does the hidden dilution alert look for?

Four things: founders dropping below 51% or below 50%, which removes the ability to pass ordinary resolutions alone, post money SAFEs already owning more than 20% before the round, pre Series A instruments totalling more than a third of the company, and any instrument converting on a cap below the round valuation. Each alert states the dollar or percentage consequence rather than just warning about it.

Is a convertible note or a SAFE better for a pre seed round?

SAFEs convert automatically at a priced round without a maturity date or interest clock. Notes have both, plus repayment obligations if no round happens. Post money SAFEs are the most founder unfriendly of the modern instruments because their fixed percentages stack against founders only, while notes and pre money SAFEs at least share the pool dilution. Model the actual stack you are being offered rather than the instrument label.