Procopio has a nice article warning startup founders and investors about changes that are coming to SAFEs, the popular convertible investment device developed by Y-Combinator.
While the standard terms of convertible notes have remained fairly constant over the years, Y-Combinator has recently made significant changes to their standard form of SAFE, recasting it as a “Post-Money SAFE.” Both founders and investors should be aware that the Post-Money SAFE differs from the old form (the “Pre-Money SAFE”) in ways that could have a major impact on the economics of the transaction and ultimately the founders’ and other early investors’ ownership.
Essentially this change, if ignored, could cause much more dilution for the founders.
the key point for founders and investors to be aware of is that, with the Post-Money SAFE, the higher the amount of SAFEs a company issues, . . . the lower each individual SAFE’s conversion price will potentially be. Thus, issuing a higher amount of Post-Money SAFEs (and convertible promissory notes) can result in significantly more dilution to the founders and early investors when the SAFEs convert in a financing.
Strategies for compensating for this could cause confusion and turn potential investors away.
Founders and early investors are able to compensate for this, to a degree, by setting higher valuation caps . . .. However, we suspect this may not often occur in practice, especially if investors are not familiar with the differences between the Pre-Money SAFE and the Post-Money SAFE. We believe that investors may balk at caps that seem “too high” relative to what they are accustomed to for a company at a particular stage in its lifecycle, . . .