SAFE conversion and dilution, worked end to end
Northwind's SAFE converting in a $2,000,000 Seed with a pool top-up, step by step, to a cap table that sums to 100.00%.
Dilution is what happens to a percentage when the denominator grows. Northwind's founders still hold 4,000,000 shares each after the Seed — but the fully diluted total goes from 9,000,000 to 12,198,120. This lesson walks the Seed in the order its arithmetic has to happen.
Step 1: Convert the SAFE at its cap
The post-money SAFE's price doesn't depend on the round: $5,000,000 ÷ 9,473,684 ≈ $0.527778. $250,000 buys 473,684 shares.
Step 2: Top up the pool
The unissued pool after the round must be 10% of the post-money shares. Solving for it adds 284,812 shares, in the pre-money.
Step 3: Price the round
$8,000,000 ÷ (9,000,000 + 473,684 + 284,812) ≈ $0.819798 a share. The SAFE's price is below it, so the SAFE converts at its cap, as assumed.
Step 4: Issue the new shares
$2,000,000 at that price is 2,439,624 shares — 20.00% of the 12,198,120 after the round.
Step 5: Rebuild the cap table
Every row's shares over the new total. The column sums to exactly 100.00%.
Each founder: 44.44% with just the pool, 42.22% once the SAFE is counted, 32.79% after the Seed — the same 4,000,000 shares throughout.
In this lesson: the option pool shuffle, and the same money as a SAFE and as a note at conversion.
Pages in this lesson
2 pages go deeper, about 9 minutes in all. Read them in order, or open the one you need.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- Background reading — not an authority
- Y Combinator, Post-Money SAFE (Valuation Cap, no Discount), §2 (opens in a new tab)The Safe Price, and what Company Capitalization countsFree to read
- Y Combinator, Post-Money SAFE User Guide (opens in a new tab)What “post-money” means: post the SAFEs and the old pool, not the round's new poolFree to read
- Wikipedia, “Stock dilution” (opens in a new tab)Dilution — backgroundFree to read
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- DilutionThe fall in a holder's percentage when new shares are issued. The holder's share count does not change; a round priced high enough can dilute ownership and raise the value of the stake at onceConvention
- Option pool shuffleSizing a round's new option pool as a percentage of the post-money but creating it in the pre-money, so its cost falls on existing holders and the effective pre-money is the headline pre-money less the new pool's valueConvention
- Valuation capThe highest valuation a SAFE or note converts at. On YC's post-money SAFE the Safe Price is the cap ÷ Company Capitalization, and the holder takes whichever of that or the round price issues more shares
- Fully dilutedCounting every share that exists or could: issued stock, options granted, the unissued option pool and convertible securities as converted. The basis a SAFE's Company Capitalization, a priced round's price per share and most ownership percentages are quoted on
- SAFECash from an investor in exchange for a right to shares in a future priced round, usually at a valuation cap or a discount. Not debt and not yet stock; because a SAFE can require cash on a change of control, it is often classified as a liability under ASC 480 and remeasured at fair value — the terms decide
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.