Post money means post the safes, not post the round, and the option pool moved sides

I spent 2 years explaining post money safe dilution with a sentence that sounds right and is not. Post money, I said, means the cap includes all the money. I was wrong, and it was bad advice given confidently to people who were about to sign something. It does not include the round the safes convert into, and the difference between those 2 readings is most of a founder's stake by the time a Series A closes.

The guide that comes with the document says it in 1 line, and I had read past that line more than once: “The Post-Money Valuation Cap is ‘post’ all of the safe money. It is NOT also ‘post’ the Equity Financing ... money.” The capital letters are theirs. Somebody there has clearly had this conversation as often as I have, and I had assumed for far too long that the phrase meant the obvious thing. The account that holds the round is a separate choice, and Bank Index's US bank pages show who regulates each bank.

I went looking for the original text after a founder asked me to sanity check a cap table, and I read the whole 33 page user guide rather than the 2 pages everybody quotes. What follows is what the calculation actually includes, the worked example the authors publish themselves, and the 1 line I would put in front of a founder before the next raise.

What the paper is, before what it costs

A safe is not a loan and it is not stock. No interest, no maturity date, nothing to repay. The authors describe what they were protecting when they rewrote it: the document “retains the benefits of certainty and speed, and it continues to require little to no transaction costs for companies and investors”. That is why it takes an afternoon rather than a month. What the investor holds is a right to shares later. The terms are fixed now.

Later means 1 of a few named events. The usual one is an equity financing, when the safe turns into a class of preferred stock alongside the new money. There are also provisions for a sale of the company and for dissolution, and those matter far more than founders expect, because a company that gets acquired before raising a priced round still has to work out what the safe holders get.

None of that is unusual or hidden, and none of it is buried: it sits in the first pages of a document that most people sign without opening, in the same week they are also choosing a payroll provider and arguing about a logo. My own habit for 2 years was to treat the paper as settled and argue only about the cap. That is the same as arguing about the price of a house without reading which rooms are included, and I find it slightly embarrassing to write down.

The change nobody mentions is in the denominator

Both versions give the investor, in the guide's words, a number of shares “equal to the (applicable pre- or post-money) valuation cap of the safe divided by the Company Capitalization”. All the argument lives in that denominator. The guide sets the 2 versions side by side.

I read the last 2 rows 3 times. They move money in opposite directions. Counting the converting safes makes each percentage knowable in advance. That is the entire selling point, and it is a real improvement. Excluding the option pool increase means the pool the new investor demands at the Series A is carved out of everybody except the safe holders.

So my safe holder knows what they bought on the day they wired.

The founder finds out at the Series A. The pool increase lands on the founder alone, and it lands there because of a single row in a table on page 4 of a guide that was written to make this kind of thing clearer, which it does, for anybody who reads to page 4 before signing rather than after the term sheet arrives with a number on it that nobody in the room can explain from memory.

The worked example is theirs, not mine

The guide runs its own numbers. I have not adjusted any of them. A company sells 15 per cent on safes by raising 750 thousand dollars at a 5 million dollar cap. It issues 8 per cent in options. That happens before the round. New investors want 25 per cent of the company after the Series A, and the round also creates a 10 per cent unissued pool.

The safe holders with a pro rata side letter take another 4.41 per cent of the round, which the guide backsolves with a small formula. Series A dilution therefore comes to 39.41 per cent. Nobody argued about that part. The safes take 9.09 per cent and the options 4.12, so the founders hand over 52.62 per cent of the company in a single sequence of events that each looked reasonable on the day it happened.

The number I want a founder to sit with is not the 52.62 itself. It is the note printed directly under it: “the safe ownership is post-safes. It is not post-Series A.” The 15 per cent sold on safes becomes 9.09 per cent after the round, and the founder's share falls by the whole 52.62 rather than by the 15 anybody remembers agreeing to.

Stacking, and the number that goes missing

Almost nobody sells 1 safe. The realistic pattern is a first cheque at a friendly cap, a second at a higher one 4 months later, and 3 more at whatever the market gave that quarter. Each is priced against its own cap. Each is a percentage of the company already promised to somebody, recorded on paper that lives in a different folder from the last one, signed on a different afternoon, by a founder who was thinking about the runway rather than about the sum.

The guide shows how 2 caps behave on the same money: 500 thousand dollars at a 5.5 million cap is about 9 per cent, while the same 500 thousand at 8.3 million is about 6. Sell both and you have promised roughly 15 per cent before anybody has issued a share.

The thing that goes missing is the running total, and it goes missing in exactly the companies that are moving fastest, because a founder closing 5 cheques in a quarter is closing them 1 conversation at a time and each conversation ends with relief rather than with arithmetic. Individual safes get filed as they close, usually in a folder. The aggregate exists nowhere until somebody sits down and builds it. I have not found a company that keeps this live without being asked to, and that includes 2 I would describe as unusually well run.

The awkward part is that the total is trivial to maintain. It is a column of amounts, a column of caps, and a division. It goes wrong because it belongs to nobody: the lawyer owns each document, the founder owns the relationship, and the sum of the documents owns itself.

What I would work out before signing anything

Back out the cap from the ownership you are willing to sell, rather than the other way round. The guide does this in 1 line: a founder targeting 1 million dollars for 15 per cent needs a cap of about 6.7 million, because 1 divided by 0.15 is 6.7. Starting from a cap you like the sound of is how founders oversell. I have seen it twice.

Then check what happens if the raise goes well. At the same 6.7 million cap, 500 thousand dollars sells 7.5 per cent and 800 thousand sells 12. Raising more on the same paper is not a neutral success, and the guide carries an explicit warning that if the total approaches or passes the cap, the safes “may convert into more than the estimated ownership”.

Then decide about pro rata on purpose. That right is no longer inside the document itself. It lives in a separate side letter, because, in the authors' words, the old version “were often misunderstood by both founders and investors”. Handing it out to every angel is the quiet decision that produced the 4.41 per cent above. The authors are candid about why they gave up on a single standard: “a company raising $500,000 from 10 angels investing $50,000 often has significantly different considerations than one raising $2,000,000 from a single institutional investor”.

Keep 1 model, in 1 file, with every safe listed by cap and amount, updated the day each one is signed. I have watched a founder discover the aggregate at the Series A term sheet stage, and watching somebody add up their own paper in a meeting is not an experience I would repeat.

None of this is legal or tax advice, and the model belongs to your lawyer rather than to me. What a founder can do without anybody's help is know the total percentage promised on safes at any moment, which is a subtraction rather than a legal question.

What conversion looks like on the day

The mechanics at the Series A are duller than the anxiety around them. The safe holder is issued a class of preferred stock that sits alongside the new money, with the same rights and seniority, and with a per share price worked out from the cap rather than from the round.

The guide describes the naming, and the exception inside it: the new investors take Series A-1 and the safe holders Series A-2, where “the only differences would be the name, share price, per share liquidation amount (but not the liquidation preference)”. That distinction matters in a bad outcome. In a good one it never comes up.

What surprises founders is how little discretion is left by then. By conversion day the percentage was fixed months earlier by a number written on a 5 page document, and the only variable left is the size of the option pool the new investor insists on, which under the post money version comes out of the founders rather than out of everybody.

So the decision that matters is not made in the Series A negotiation.

It is made in a coffee shop 14 months earlier, when somebody agrees to a cap because the round needs to close this week and the number sounds fine.

A short digression about why the old version felt safer

Founders who used the original document often remember it fondly, and I think the reason is psychological rather than financial. Under the old paper nobody knew the final percentage until conversion, so nobody had to look at it. The post money version prints the number on the day of the wire. That is better in every practical sense and it feels worse, because a known 15 per cent is harder to carry around than an unknown one. Anyway, back to the arithmetic.

What I could not establish

How much of the market this actually describes. The guide is a legal document with worked examples, not a survey, and I have not found published data on what share of companies raise on post money paper, how many safes a typical company stacks, or how often the cap is exceeded. Anyone quoting a median here is estimating.

Whether the option pool exclusion is negotiated in practice. My guess is that it almost never is for small cheques and occasionally is for a lead investor writing most of the round, but that is a guess and I have not seen enough signed paper to defend it. I asked 2 founders and got 2 stories that contradicted each other on the same point, which is usually a sign that both were describing 1 deal each rather than a pattern.

The detail I keep thinking about is that the fix and the trap arrived in the same document. The change that made a safe honest, counting the converting safes so the investor knows what they own, is the same change that moved the option pool increase onto the founder. Both were reasonable decisions and I would probably have made them too. Nobody I asked will say how many founders read the denominator table before signing, and I suspect the honest answer is close to none, because the table sits on page 4 of a document most people treat as a formality.