Startup Evolution / A Year-Long Journey through A Founder’s Toolkit: Cap Table Mastery - SAFEs, Notes and Planning for Dilution

Early-stage fundraising often relies on SAFEs or convertible notes to bring in capital before a formal valuation. These instruments are quick and founder-friendly at the outset, but carry hidden dilution and complexity that can catch founders off guard at Series A. In this seventh installment of Startup Evolution: A Year-Long Journey through a Founder’s Toolkit, we will demystify how SAFEs (with an emphasis on post-money SAFEs) and convertible notes impact your equity in a C-corp startup. We will compare pre-money vs. post-money SAFEs, outline key differences from convertible notes and offer pragmatic strategies to plan for dilution. The goal is to help you approach your first priced round with eyes wide open and your cap table under control.

SAFEs vs. Notes in 2025: The Early-Stage Financing Landscape

Over the past few years, SAFEs (Simple Agreements for Future Equity) have become the dominant seed financing tool for startups, outpacing the traditional convertible note. The vast majority of these SAFEs use Y Combinator’s post-money SAFE format, indicating investors’ strong preference for the newer structure. Convertible notes are still used in some deals, but they have taken a back seat in the earliest stages of funding.

What is the difference? A SAFE is essentially a contract promising future equity in a priced round; it is not debt – there is no interest and no maturity deadline for repayment. In contrast, a convertible note is a debt instrument: it accrues interest and typically has a maturity date by which, if no financing occurs, the note might convert into equity or require repayment. Both SAFEs and notes usually include a valuation cap (the maximum company valuation at which they will convert) or a discount on the future round’s price. Both allow you to delay setting a valuation today. However, that very feature means uncertainty for everyone involved, as you will not know exactly how much ownership you are giving away until the conversion happens at the next priced round. This can lead to dilution surprises if not carefully planned.

From a founder’s perspective, SAFEs often feel simpler and more “forgiving” in the short term. There are no monthly interest accruals or looming deadlines, and closing a SAFE round involves far less paperwork than an equity round. But simplicity now can lead to complexity later. A cap table heavily weighted with SAFEs or notes requires careful management to maintain investor confidence. Remember that future VCs will scrutinize how much of your company is already spoken for by these instruments. As we will see, too many overlapping SAFEs can spook investors by creating a muddled ownership picture. The key is to embrace these early financing tools while staying strategic about their terms and anticipating their impact on your ownership.

Pre-Money vs. Post-Money SAFEs: Mind the Dilution Gap

Not all SAFEs are created equal. It is essential to understand the distinction between pre-money and post-money SAFEs, because this choice has a major effect on your dilution. A post-money SAFE sets a fixed ownership percentage for the investor, but a pre-money SAFE does not. In other words, a post-money SAFE effectively locks in the investor’s slice of the pie at the moment of conversion, whereas a pre-money SAFE’s ultimate percentage is fluid until your Series A is priced.

Here is how that plays out:

• Pre-money SAFEs were the original incarnation. When you raise multiple pre-money SAFEs, each SAFE’s conversion will dilute the others. Neither you nor your SAFE investors can know exactly what percentage of the company each SAFE will convert into until the dust settles at the Series A. All the SAFEs (and any notes) in that round affect each other’s final stake. This uncertainty can be uncomfortable, and it often surprised founders who stacked several SAFE rounds.
• Post-money SAFEs flipped the script. With a post-money SAFE, the conversion calculation includes all the money raised in SAFEs/notes ahead of the new financing. This means each post-money SAFE investor is assured a fixed percentage of the company’s equity when they convert. For example, if an investor puts $100,000 into a post-money SAFE with a $5 million post-money valuation cap, they are effectively promised about 2% of the company after the next round (assuming the cap applies). If you then raise another $100,000 on the same terms, that new SAFE investor also expects ~2%. Critically, the earlier SAFE holder does not get diluted by the later one; instead, both SAFEs just eat more of the pie, mostly at the expense of the founders’ ownership. This is why post-money SAFEs are considered more investor-friendly (and why investors like them).

For founders, however, stacking multiple post-money SAFEs can be perilous. You incur dilution on each SAFE round that does not hit until the Series A, but when it does, it hits all at once. Two rounds of SAFEs, each giving away ~20% of the company, are not the same as two priced equity rounds at 20%. In fact, the math can leave founders with far less than expected. Bottom line: If you use post-money SAFEs (and in 2025, you probably will, since that is the market norm), go in with a clear plan. Know that every dollar you raise on a SAFE with a given valuation cap is locking in someone else’s future ownership percentage. Raise what you need, but be mindful that doing multiple SAFE rounds without an equity round in between will compound your dilution in the end.

Convertible Notes: Old-School Convertibles with a Twist

Convertible notes may be less trendy now, but many startups still have them on the cap table. Legally, a note is debt, which means a few things for modeling and planning:

• Interest and Maturity: Notes accrue interest (often 4–8% annually) that will convert into additional shares at the financing. They also have maturity dates (commonly 12–24 months). If you hit the maturity date without a priced round, in theory, the note holder could demand repayment. In practice, most will negotiate an extension or conversion, but it is a situation you would rather avoid. The ticking clock of a note adds pressure that SAFEs do not have.
• Pre-Money Conversion: Most notes use a pre-money conversion formula, meaning that when they convert, the calculation of the price per share excludes the note itself and any other concurrent convertibles. This is the opposite of a post-money SAFE. The result: if you raised multiple notes, those note investors dilute each other when converting. The first $100,000 note on a $1 million cap might buy ~10% of the company post-Series A. But, if you raised a second $100,000 note on the same cap, by the time both convert, each noteholder ends up with slightly less than 10% (because the second note increased the total pre-money valuation). From the founder’s perspective, this shared dilution is a silver lining. Additional notes do not balloon your dilution as starkly as additional post-money SAFEs do. However, new equity investors in the priced round often view multiple notes as a complexity (different interest accruals, varying terms, etc.).
• Conversion Terms: Like SAFEs, notes may carry valuation caps and/or discounts.

One practical implication of the above: mixing SAFEs and notes can get complicated. You might have some investors on SAFEs (no interest, no maturity, post-money) and others on notes (interest, maturity, pre-money). When a financing triggers conversion, you will be crunching two different formulas. If not carefully managed, this can lead to confusion and even disputes. It is entirely doable, just make sure your legal counsel and cap table software are primed to handle it, and communicate clearly with all investors about how their investment will convert.

Planning for Dilution: Option Pool Refreshes Before Series A

Another dilution factor to plan for is the employee option pool. Venture investors expect startups to have a pool of equity set aside for current and future employees. If your pool is running low, a Series A lead will likely insist on increasing the option pool as part of the round. Crucially, they will want that pool expansion to happen pre-money (i.e., before they invest) so that the dilution from creating new option shares hits existing shareholders (you and your early investors), not the new investor. This is often called the “option pool shuffle.” Practically, it means if your pool is, say, 5% of the company today and the VC wants it to be 15% post-round, you will be issuing a bunch of new shares into the pool right before the financing closes. That issuance dilutes everyone who came before, including founders, SAFE and note holders.

Founders should strategically anticipate this. It can be wise to increase your option pool ahead of fundraising to demonstrate foresight and to possibly negotiate a higher valuation (since the investor does not need to account for creating the pool themselves). By sizing your pool in advance, you maintain more control over how much founder equity you are willing to give up for future team growth.

When modeling your cap table for a Series A, always include a realistic option pool increase. Typical pools after a Series A can range from 10–20% of the post-money cap table (depending on your hiring plan and what the VC expects). If you currently have, say, 5% unallocated, recognize that another 10%+ worth of new shares may be created. If you are using post-money SAFEs, note that the standard SAFE formula excludes any new shares created for an option pool expansion at the time of conversion. That means your SAFE holders will not share in the dilution from the new pool. The takeaway: if you have a chunk of SAFEs, the option pool refresh will further concentrate dilution on the founders’ shoulders. Plan accordingly!

Modeling Conversion Scenarios to Avoid Surprises

To truly master your cap table, you should project what the conversion of your SAFEs and notes will look like under different scenarios. This is where a bit of spreadsheet work (or using cap table management software) pays dividends. Start by listing each SAFE and note with its key terms (valuation cap, discount, interest rate if any, etc.), and then model the Series A conversion: What if your Series A comes in at a $10 million pre-money? At $20 million? At just the cap level? By plugging in the numbers, you will see how much of the company each SAFE or note would convert into and how much ownership you, the founder, retain. I also highly recommend keeping a “living” cap table model from day one of your financing activities. Update it every time you take a new SAFE or note. The goal is to walk into your Series A negotiation knowing exactly where you stand and ensuring there are no nasty surprises when all the conversions happen.

Managing Cap Table Chaos: Multiple SAFEs and Notes

One of the biggest cap table pitfalls is the “messy stack” (having numerous SAFE and note rounds with all different terms). It is not uncommon: perhaps you raised money in dribs and drabs—a few SAFEs at one cap, then a bridge note with a different cap, then more SAFEs at a new cap. Each seemed innocuous at the time, but together they create a complex web for conversion. As a founder, it is on you to keep this under control. Otherwise, you risk conversion chaos when the equity round finally comes.

What does cap table chaos look like? For one, it can delay or jeopardize your Series A. If your lead investor sees a tangle of agreements, including some pre-money SAFEs, some post-money SAFEs, multiple notes that all convert at different prices, possibly with different discount rates or accrued interest, and the need for an option pool, they may become nervous. They might question your grasp on the company’s economics or worry that sorting out the conversions will be a headache. In the worst case, we have seen companies postpone a financing for months to clean up such issues, or even have to grant extra equity to early investors as a concession for conversion quirks. You do not want to be in that position when you should be focusing on closing a deal and growing the business.

How to avoid this? Simplicity and transparency. Whenever possible, try to raise your early funds on uniform terms (e.g., set one valuation cap for all SAFEs in a given round, instead of giving each angel a different deal. If you need to adjust terms as your company progresses (say, your traction improves and you want a higher cap for new money), consider formally separating the round (“SAFE Round 1” vs “SAFE Round 2”) rather than mixing a bunch of divergent agreements at the same time. This way, you and your lawyers can clearly track which SAFEs convert how. It also feels fairer to investors: everyone in a tranche plays by the same rules.

Finally, communicate early and often. Talk to your legal counsel well before a prospective Series A about the plan for converting all those SAFEs/notes. Ensure all terms (discounts, caps, whether anyone has pro rata rights, etc.) are documented in one place. If there are any ambiguities or potential conflicts (for instance, a “Most Favored Nation” clause that could let one SAFE holder re-open terms if another got a better deal), address them proactively with amendments or investor conversations. It is much better to sort out any conversion mechanics questions before you are under the gun with a big financing on the line. With good planning, even a handful of SAFE and note rounds can convert smoothly and without drama.

Conclusion: Be Proactive and Leverage Your Resources

Mastering your cap table early is a strategic investment in your startup’s future. By understanding the nuances of SAFEs vs. notes, choosing the right structure (post-money SAFE is usually the wise choice today) and modeling your dilution, you put yourself in the driver’s seat. Rather than being hit with unpleasant surprises or last-minute cap table scrambles, you will walk into investor meetings with a clear picture of where you stand. This not only protects your founder equity, it also signals to investors that you are a thoughtful, well-prepared founder.

Finally, do not hesitate to seek expert help. Cap table and dilution modeling can get complicated, but you don’t have to figure it all out alone. As an experienced startup & venture attorney, I invite founders to reach out for a cap table review or a conversion modeling session. Sometimes, a short consultation is all it takes to spot potential issues and shore up your plan. Early planning and advice can save you from costly mistakes down the road. Your equity is the bedrock of your startup’s value. Handle it with care now, and you will set the stage for a successful Series A and beyond. Feel free to get in touch for guidance, and let’s ensure you enter your next stage of growth with a cap table built to support your vision.

Author Jason Acevedo is a partner in the Venture Capital & Emerging Growth practice group in the Corporate and Securities Department at Klehr Harrison.

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