Carolynn Levy and Kirsty Nathoo - Startup Investor School Day 1

When a company raises a priced round (like Series A or Seed), the SAFE converts into shares. This conversion can be based on a valuation cap, a discount rate, or the priced round's valuation, whichever offers the investor a better deal, to reward them for early investment risk.

The valuation cap is the maximum valuation at which your SAFE will convert into equity. If the priced round's valuation is higher than the cap, your SAFE converts at the cap, giving you more shares than if you had invested at the higher round valuation. It's a reward for early risk.

In an acquisition, your SAFE typically converts into common stock based on the valuation cap and you participate in the proceeds. If the company fails, SAFE holders are creditors and get repaid before stockholders, though often there's not enough to cover full repayment.

The handshake protocol is an email exchange between the founder and investor that confirms the key terms (investment amount and cap) before the SAFE is formally signed. It helps prevent misunderstandings and establishes a mutual commitment early in the process.

Your initial ownership calculation based on the SAFE terms is an estimate. Dilution from the new money invested in the priced round, the creation of an employee stock option pool, and the specific terms of the conversion can all reduce your final ownership percentage.

Pro-rata rights grant SAFE investors the option to purchase additional shares in future funding rounds to maintain their percentage ownership. While not always included in the initial SAFE conversion, they can often be negotiated via side letters.

Traditionally, pro-rata rights were for subsequent rounds, not the conversion round. However, investors can negotiate a side letter with the company to secure pro-rata rights during the initial SAFE conversion, allowing them to buy more shares at the lead investor's price.