How to account for a SAFE: cash today, shares later, a liability in between

01What you actually signed#

A simple agreement for future equity is a right to shares, not shares. It has no interest and no maturity date, which is what separates it from a convertible note. It converts at your next priced round, at a price set by a valuation cap, a discount, or both, whichever gives the investor more shares. If the company is sold or wound down first, the investor generally gets their money back or its as-converted value, ahead of common.

Since 2018 most SAFEs are post-money: the cap is the company’s value including all the SAFE money. That makes the dilution easy to see on the day you sign. Investment divided by post-money cap is the investor’s ownership just before the round, and a stack of them adds up.

02Where it goes on the balance sheet#

On the day the money lands, cash goes up and so does a SAFE liability, for the same amount. Not revenue, which would overstate the year and confuse every investor who reads it. Not common stock, which would claim shares that don’t exist yet.

Most SAFEs are classified as liabilities under ASC 480 because the number of shares they settle into varies, and some can be settled in cash. A liability under ASC 480 is generally carried at fair value, so a company with audited statements may remeasure it at each reporting date and run the change through the income statement. At seed, many companies carry it at the amount received until a CPA or auditor says otherwise. Whichever you do, write the policy down.

03At the priced round#

The SAFE converts, the liability is extinguished, and the investor becomes a shareholder. Four things have to happen together:

• The SAFE’s conversion price: the cap divided by the company’s capitalization as the SAFE defines it, or the round price less the discount, whichever is lower.
• Shares issued: the investment divided by that price, usually as the same series of preferred the new investors buy.
• The entry: the SAFE liability comes off, preferred stock and additional paid-in capital go on. Any fair-value change up to that day goes through earnings first.
• The cap table and the equity on the balance sheet are updated on the same day, and tie.

04A worked conversion#

Founders hold 8,000,000 shares and the option pool is 1,500,000: 9,500,000 in all. An investor puts in $500,000 on a post-money SAFE with a $10,000,000 cap and a 20% discount. The SAFE is 5% of the company on an as-converted basis, so the capitalization including it is 9,500,000 ÷ 0.95 = 10,000,000 shares, the SAFE price is $10,000,000 ÷ 10,000,000 = $1.00, and the SAFE converts into 500,000 shares.

A Series A then raises $4,000,000 at a $20,000,000 pre-money valuation, on 10,000,000 pre-money shares: $2.00 a share, for 2,000,000 new shares. The discount would price the SAFE at $1.60, which is higher than $1.00, so the cap wins. After the round there are 12,000,000 shares, and the SAFE investor’s 500,000 are 4.17% of them: 5% before the round, diluted by the new money like everyone else. (A real round usually also tops up the option pool before the new money comes in, which moves every figure here.)

On the books, the $500,000 SAFE liability comes off and the preferred stock goes on: at a par value of $0.00001, 500,000 shares are $5.00 of preferred stock and $499,995.00 of additional paid-in capital.

05What goes wrong#

SAFEs booked to revenue, or to a suspense account nobody looks at. SAFEs missing from the cap table, so the founders’ ownership after the round is a surprise. Several SAFEs at different caps modeled as one. And a pro rata side letter that nobody remembered. A diligence team reads the documents, rebuilds the conversion and compares it to your cap table. They should agree before anyone asks.