Case 029Cap tables and round modellingHard

Sikkavik Payments raised Rs 4 crore on a SAFE with a Rs 40 crore cap, and now raises a Series A. How do the founders fare if the SAFE was pre-money versus post-money, and who carries the SAFE's dilution in each case?

The situation

Sikkavik Payments, a payments start-up for small merchants, has two founders holding 100 lakh shares between them and nothing else on the cap table. A year ago it raised Rs 4 crore on a SAFESimple agreement for future equity: the investor pays now and receives shares at the next priced round, usually at a price capped by a stated valuation. with a valuation cap of Rs 40 crore and no discount.

Now a Series A investor puts in Rs 20 crore at a Rs 100 crore pre-money valuation. Ignore any option pool. Compare two versions of the same SAFE: a pre-money SAFE, where the cap is divided by the shares outstanding before the SAFE and the Series A price is set on the founders' shares alone, and a post-money SAFE, where the SAFE's stake is fixed at Rs 4 crore over Rs 40 crore of the company before the Series A, and the Series A pre-money includes the SAFE's shares.

Your task

Build both cap tables after the Series A, compare the founders' ownership, and explain who carries the SAFE's dilution in each.

Quick check

Under which SAFE do the founders end up owning less after the Series A?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

The founders own 76.92% after the round with a pre-money SAFE and 75.00% with a post-money SAFE. A post-money SAFE fixes its 10% stake and sits inside the Series A's pre-money, so the founders carry all of it. A pre-money SAFE converts on top of the founders' shares, so the Series A buys at Rs 100 a share and gives up 1.28 points of its own. Read how the term sheet defines pre-money.

Step 1What does each SAFE actually promise the investor?

Imagine lending a friend money for a share of a flat she has not priced yet, and agreeing your share will be worked out as if the flat were worth at most Rs 40 lakh. Whether your share is worked out before or after other co-owners join changes who gives up space for you. A pre-money SAFE says: convert at the cap divided by the shares that exist before the SAFE. A post-money SAFE says: you will own exactly Rs 4 crore over Rs 40 crore, 10%, of the company just before the next round. The cap is the same Rs 40 crore. The base it is measured on is not.

Run the pre-money SAFE. The founders hold 100 lakh shares, so the SAFE's price is Rs 40 crore over 100 lakh, Rs 40 a share, and Rs 4 crore buys 10 lakh shares. The Series A prices Rs 100 crore over the same 100 lakh shares, Rs 100 a share, and Rs 20 crore buys 20 lakh. Total 130 lakh shares: founders 76.92%, SAFE 7.69%, Series A 15.38%.

Now the post-money SAFE. It must own 10% of the founders' shares plus its own, so it gets 100 times 10 over 90, 11.11 lakh shares, at Rs 36 each. The Series A's Rs 100 crore pre-money is now spread over 111.11 lakh shares, a price of Rs 90, so Rs 20 crore buys 22.22 lakh. The founders end at 75.00%, the SAFE at 8.33% and the Series A at exactly the 16.67% it paid for.

With a pre-money SAFE the founders keep 76.92% and the Series A buys at Rs 100 a share for 15.38%; with a post-money SAFE the founders keep 75.00% and the Series A buys at Rs 90 for 16.67%.

Step 2Who carries the SAFE's dilution in each case?

Compare both against a round with no SAFE at all: Rs 20 crore at Rs 100 crore pre-money would leave the founders 83.33% and the Series A 16.67%. Under the post-money SAFE the founders give up 8.33 points, the SAFE's entire stake, and the Series A gives up nothing. Under the pre-money SAFE the founders give up 6.41 points and the Series A 1.28. The pre-money SAFE spreads the cost because its shares arrive on top of a share count the Series A also priced on.

Against a no-SAFE round, a pre-money SAFE costs the founders 6.41 points and the Series A 1.28, while a post-money SAFE costs the founders all 8.33 points and leaves the Series A's 16.67% untouched.

Step 3Why do founders sign post-money SAFEs anyway, and what is the catch?

Because they are clear. The SAFE investor knows its percentage on the day it signs, and the founder can see exactly what each SAFE costs. The catch is stacking: every additional post-money SAFE comes entirely out of the founders, because each one fixes its own percentage regardless of the others. Two more SAFEs of the same size would cost the founders another 20 points before any priced round.

Say the limitation, which is where interviewers push. The pre-money SAFE only shares dilution if the Series A sets its price on the shares outstanding before conversion. Many Series A term sheets define the pre-money as fully diluted, including every converting SAFE and note, which pushes the whole cost back to the founders whatever the SAFE type. So the real answer is: read the definition of pre-money in the term sheet before you celebrate the SAFE you signed.

Where candidates lose it

The common loss is treating the cap as the only number that matters and giving the same cap table for both SAFEs. The cap sets the price; the base it divides by decides who pays, and that is the whole question.

The second is forgetting that a Series A investor will not quietly accept a lower stake than it paid for. Under the pre-money SAFE it ends with 15.38% for Rs 20 crore, an effective post-money of Rs 130 crore, and it will usually try to fix that in the term sheet's definition of pre-money.

What the interviewer asks next

Add a second Rs 4 crore post-money SAFE at the same cap. What do the founders own after the Series A?
The SAFE also has a 20% discount. Does the cap or the discount bind at a Rs 100 crore pre-money?
How would a 10% option pool created in the Series A pre-money change both tables?

Company names and figures are illustrative.