SAFEs and convertible notes: caps, discounts, and what converts

A convertible note is debt. It accrues interest, has a maturity date, and converts into equity at the next qualifying financing. If no financing happens before maturity, the note technically becomes repayable — a lever that is rarely pulled but exists.

A SAFE — simple agreement for future equity — is not debt. No interest, no maturity, no repayment. It is a right to shares at a future priced round. The simplicity is why it now dominates early-stage financing in most markets, but it also means there is no forcing date at which the ambiguity resolves.

A valuation cap sets a maximum price at which the money converts. Invest $500,000 on a $5M cap, and if the priced round happens at $20M, you convert as though the company were worth $5M — receiving four times the shares that price would otherwise buy.

A discount does something smaller: it converts at a percentage below the round price, typically ten to twenty-five percent. When both a cap and a discount exist, the investor gets whichever produces more shares. In practice, in any successful company, the cap does the work and the discount is irrelevant.

This distinction is the single most consequential detail in the document. Under an older pre-money SAFE, multiple SAFEs dilute each other, and the exact ownership each one receives depends on how many others convert alongside it. Under the now-standard post-money SAFE, each holder's percentage is fixed at signing and everyone else — meaning the founders — absorbs the dilution.

Post-money SAFEs are clearer for investors and more expensive for founders. Signing four post-money SAFEs at ten percent each does not mean 'roughly a third of the company'. It means exactly forty percent, before the priced round investor takes their share on top.

Consider a founder who raises $250K on a $5M post-money cap, then $500K on a $8M cap, then $1M on a $12M cap. Each felt reasonable in isolation. At the priced round, those three instruments convert to 5%, 6.25% and 8.3% respectively — nearly twenty percent of the company gone before the Series A investor's twenty percent and before the option pool.

The founders enter their Series A owning around sixty percent between them, which is survivable, but a fourth SAFE or a lower cap tips it into territory where the next round's dilution becomes a problem investors themselves will raise.

The first is not maintaining a running model of fully converted ownership. A cap table that shows founders owning one hundred percent while $2M of SAFEs sits outside it is not a cap table, it is a fiction. Model conversion at a plausible round price after every single instrument signed.

The second is raising repeatedly on rising caps as a substitute for a priced round. Each raise feels like progress, but the accumulated conversion can leave so little room that the Series A becomes structurally hard to price. At around a million and a half raised on convertibles, it is usually time to do a priced round instead.

Early financing in Garage to IPO behaves the same way: money now, ownership later. Your equity percentage in the KPI header reflects fully converted ownership rather than the flattering pre-conversion figure, so the cost of an early raise is visible from the moment you accept it.

That design is deliberate. The most common lesson players take from a first run is that the money raised in the garage was the most expensive money in the entire company's history.