Waterfall IQSAFEs in an exit: cap, discount and a low sale
A SAFE is money invested now that turns into shares later. In a sale that happens before it has converted, what it receives depends on the price, and it can behave in three different ways.
The terms that matter
- Purchase amount. The money the investor paid in.
- Valuation cap. The highest company value at which the SAFE converts. A lower cap gives the investor more shares for the same money.
- Discount. A percentage off the share price at which it can convert instead. The SAFE converts at whichever of the two prices is lower for the investor.
- Pre-money or post-money. Whether the cap is measured before the SAFEs convert or including the shares they create. With post-money caps, the investor's ownership is simply its amount divided by the cap.
Three regimes, by price
- A low sale: nothing, or partly repaid. SAFEs rank behind preferred stock. If the price does not cover the preferences, a SAFE may receive nothing. Once the preferences are covered, it is repaid its purchase amount, up to what is left.
- A middle sale: converts at the discount price. When the price is high enough for common stock to be worth something, the SAFE converts. If the discount gives the lower price, it receives roughly its amount divided by one minus the discount: $10M at a 20% discount becomes $12.5M of value.
- A high sale: converts at the cap price. At higher prices the cap price becomes the cheaper one, and the SAFE receives a fixed percentage of the company. From here its payout rises with the sale price.
An example
A company has 24,000,000 common shares and a $10M post-money SAFE with a $50M cap and no discount. The SAFE therefore owns 10M / 50M = 20% of the company after it converts. There are no other preferred shares.
| Sale price | SAFE receives | Why |
|---|---|---|
| $6M | $6M | Nothing is ahead of it, but the price is below its $10M amount, so it takes everything |
| $10M | $10M | Repaid at its purchase amount |
| $40M | $10M | Converting would give 20% of $40M = $8M, which is less than $10M, so it keeps the face amount |
| $100M | $20M | Converts at the cap: 20% of $100M |
A SAFE is therefore paid the greater of its purchase amount and its conversion value, and the crossover is the price where its percentage of the total equals its amount: $50M here. Between the extremes, the tool shows each regime and the exact prices at which one gives way to the next.
Why a chart beats a number
Because the SAFE's payout depends on the price in three different ways, a single breakpoint table cannot describe it. A chart of what the SAFE receives across all prices, with the regimes shaded, shows at a glance where it is repaid, where it converts at the discount and where it converts at the cap. That is how Waterfall IQ shows SAFEs on the breakpoints page.
The example assumes no other preferred stock, debt or costs. This guide is general education, not legal, tax or investment advice.
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