Modeling SAFEs and Convertible Notes in Your Cap Table

By the time a founder reaches their first priced round, they have usually issued several Simple Agreements for Future Equity (SAFEs) or convertible notes, sometimes both. The cap table looks manageable. Then the term sheet arrives, the conversion math runs, and the ownership percentages are nothing like what anyone expected. The instruments themselves are not complicated. The errors come from modeling them incorrectly, or not modeling them at all, before the round closes. This guide walks through how each instrument works, how the key terms interact, and how to build a pro forma cap table that reflects the actual post-conversion picture. For a broader foundation on cap table mechanics, see understanding cap table management.

SAFEs vs. Convertible Notes: The Core Distinction

Both instruments defer the question of price per share until a future priced round. That is where the similarity ends.

A convertible note is debt. It carries an interest rate and a maturity date. If the company has not raised a qualifying priced round by the maturity date, it is typically required to repay the noteholder's principal plus accrued interest. For example, a $100,000 note at an 8% annual interest rate with a one-year maturity would require a $108,000 repayment if no conversion event occurs.

A SAFE is not debt. It has no interest rate and no maturity date. The investor does not receive repayment if the company never raises a priced round; the SAFE simply does not convert. That simplicity is why SAFEs have become the dominant seed instrument. In Q1 2025, SAFEs comprised 90% of all pre-seed rounds on Carta, with convertible notes making up the remaining 10%.

Key Terms: Valuation Cap, Conversion Discount, and MFN

Both SAFEs and convertible notes can include a valuation cap, a conversion discount, or both. Understanding how these terms interact is the foundation of accurate cap table modeling.

Valuation Cap

The valuation cap sets the maximum company valuation at which the investor's money converts into equity. It acts as a ceiling on the price per share the SAFE or note investor will pay, regardless of how high the company's valuation is in the priced round. The cap is typically the most intensely negotiated term in any SAFE.

One detail founders often miss: the cap is a ceiling, not a floor. If the priced round valuation is lower than the cap, the SAFE converts at the lower round valuation, which is more favorable to the investor.

Conversion Discount

A conversion discount gives the investor a percentage reduction off the price per share paid by new investors in the priced round. A 20% discount means the note or SAFE converts at 80% of the Series A price per share. When an instrument has both a cap and a discount, the investor typically converts at whichever term produces the lower price per share.

Most Favored Nation (MFN) Clause

An MFN clause protects early investors. If the company later issues a SAFE on better terms, such as a lower valuation cap or a higher discount, the MFN clause automatically upgrades the original investor to those improved terms. The clause stops applying once the investor's instrument converts into stock.

Pre-Money vs. Post-Money SAFEs

The distinction between pre-money and post-money SAFEs is the single most common source of cap table confusion at seed stage.

On a post-money SAFE, the valuation cap refers to the post-money valuation. This locks in a fixed ownership percentage for the investor at conversion, regardless of how many other SAFEs are outstanding. The key consequence: if a founder raises multiple post-money SAFEs at different caps, each one locks in its own ownership percentage, and the additional dilution falls on the founders and employees, not on the earlier SAFE investors.

On a pre-money SAFE, the investor's ultimate ownership percentage depends on how much other convertible capital is converting at the same time. That makes it harder for either party to know their exact post-conversion ownership before the priced round terms are set.

Modeling Convertible Notes: Interest Accrual Matters

When modeling a convertible note in your cap table, the principal alone is not the right input. Interest accrues from the date of issuance, and in most cases that accrued interest converts alongside the principal at the priced round.

The standard modeling approach is to estimate the interest that will have accrued by the anticipated conversion date, then add it to the principal to get the total converting amount. For a $500,000 note at 8% annual interest with an expected 18-month conversion timeline, the converting amount would be approximately $560,000, not $500,000. That $60,000 difference translates directly into additional shares issued to the noteholder.

Converting Amount = Principal + (Principal × Annual Rate × Years Elapsed)

Example:
  Principal:      $500,000
  Annual Rate:    8%
  Years Elapsed:  1.5
  Accrued Interest: $500,000 × 0.08 × 1.5 = $60,000
  Converting Amount: $560,000

Conversion Price = MIN(Cap Price per Share, Discount Price per Share)
  Cap Price = Cap Valuation ÷ Fully Diluted Shares Pre-Money
  Discount Price = Round Price per Share × (1 - Discount %)

Shares Issued = Converting Amount ÷ Conversion Price

Building the Pro Forma Cap Table: Step by Step

A pro forma cap table models the post-conversion ownership picture before the priced round closes. Here is what typically happens when you build one from scratch.

1. Pull your current fully diluted share count from your cap table, including issued common shares, outstanding options, and shares available in the option pool.
2. List every outstanding SAFE and convertible note with its principal, valuation cap, discount rate, and instrument type (pre-money SAFE, post-money SAFE, or convertible note).
3. For convertible notes, add estimated accrued interest to the principal to get the total converting amount.
4. Input your target priced-round pre-money valuation and new investment amount (excluding SAFEs and notes).
5. Account for any new employee option pool expansion required by the lead investor, as this typically happens before conversion and affects the pre-money fully diluted share count.
6. Calculate the conversion price for each instrument using the lower of the cap price and the discount price.
7. Divide each instrument's converting amount by its conversion price to get the shares issued at conversion.
8. Sum all share classes (founders, employees, SAFE investors, note investors, new priced-round investors) to produce the post-money fully diluted ownership table.

Common Modeling Errors and How to Avoid Them

The SAFE Dilution Trap: A Worked Example

Here is what typically happens when founders stack post-money SAFEs without modeling the cumulative effect.

Suppose a company raises three post-money SAFEs: $500,000 at a $5M cap, $750,000 at an $8M cap, and $500,000 at a $10M cap. Each locks in its own ownership percentage at conversion. The $5M-cap SAFE converts at 10% ownership ($500K / $5M). The $8M-cap SAFE converts at approximately 9.4% ($750K / $8M). The $10M-cap SAFE converts at 5% ($500K / $10M). That is roughly 24% of the company committed to SAFE investors before the Series A even opens.

The Series A investor then negotiates a 10% post-money option pool and takes 20% of the company. The founders are left with less than half the company after a round that, on paper, looked like a strong outcome. The key is that none of this is hidden; it is all visible in a properly built pro forma. The problem is that most founders see it for the first time when the lawyer sends the closing documents.

For a deeper look at how valuation methods interact with cap table mechanics, the post on startup valuation methods explained covers the Backsolve Method and how a recent funding round price feeds back into a 409A analysis.

When to Refresh Your Model

A pro forma cap table is not a one-time exercise. Update it each time you issue a new SAFE or note, each time an existing instrument's terms change (including MFN triggers), and before you begin any priced-round negotiation. The pre-money valuation you agree to with a lead investor determines the conversion price for every outstanding instrument simultaneously. Running the model only after the term sheet is signed leaves no room to negotiate.

The mechanics of SAFEs and convertible notes are not inherently difficult. What makes them dangerous is the gap between when the instruments are issued and when their dilutive effect becomes visible. A pro forma that models each tranche explicitly, with correct interest accrual, the right SAFE type, and all MFN provisions accounted for, closes that gap before it costs you.