A $4 million acquisition sounds different when you have spent three years discussing a billion-dollar market. It sounds different again when you discover that $4 million is not a wire to the founder.
This chapter models a sale before the SAFEs convert. A sale after a priced round introduces the preferred-stock documents and their actual preferences. The same screenshot cannot do both jobs.
The provision on the table
Fictional sale summary: $4 million is available before $250,000 of senior claims. Outstanding cap-only SAFEs seek their contractual greater-of outcome; an unelected current MFN seeks its purchase amount. Cash claims share their priority layer. Common receives the residual.
Our explanatory wording, not a quotation or modification of a YC form. Open a margin note:
What this means
Purchase price is not founder proceeds. This is a sale before SAFE conversion, not a priced round followed by a sale.
What works for you
The non-participating structure avoids collecting both a full cash preference and common conversion proceeds on the same SAFE.
Where it can bite
Debt priority and available proceeds can leave common with little or nothing. Even a cash claim can be paid only partially.
If you do not ask
A dollar waterfall for a small, medium and large sale, including creditors, actual classes, fees, taxes and each instrument’s election rules.
Inside the investor’s head
The cash preference protects downside only to the extent proceeds remain. Conversion trades priority for participation in a larger residual.
The current cap-only form provides a liquidity outcome based on the greater of a purchase-amount cash claim and its as-converted result. It is non-participating: not a full cash return plus a second helping as common. Debt and creditor claims rank ahead of SAFE cash claims; insufficient cash in the SAFE preference layer is shared proportionately. Conversion proceeds sit with common behind cash preferences. 1
The current unelected MFN form is different: its liquidity entitlement is the purchase-amount cash claim. It does not inherit the cap-only upside formula while waiting for a cap. 2
Our hypothetical stack has $500,000 at a $5 million cap, $500,000 at a $10 million cap, and an early $250,000 unelected MFN. There are no options or other equity classes. The buyer’s $4 million is the modeled available sale amount before $250,000 of senior creditor claims; transaction costs and taxes are excluded.
After creditors, $3.75 million remains. Neither capped holder’s conversion outcome beats its $500,000 cash claim. The three SAFEs take $1.25 million in total. The founder’s modeled common receives $2.5 million.
That is a respectable outcome for many businesses. It is $1.5 million below the headline.
Now make the sale larger
Use the same instruments and $12 million of sale proceeds, with the same $250,000 senior claims. The unelected MFN takes its $250,000 cash amount. The residual for conversion and common is $11.5 million.
Both capped holders convert in this example. Their respective 10% and 5% liquidity fractions produce $1.15 million and $575,000, leaving $9.775 million for the founder. These figures depend on excluding the cash-taking MFN from the liquidity capitalization. 13
You cannot copy the financing ownership chart into this waterfall. Its denominator includes securities and, potentially, an unissued pool that the liquidity definition treats differently. Mixing those definitions can produce a precise-looking answer to a transaction nobody signed.
Now make it unpleasant
At a $1 million sale with $250,000 of senior claims, $750,000 remains against $1.25 million of modeled SAFE cash claims. Each holder receives 60% of its purchase amount: $300,000, $300,000 and $150,000. Founder common gets zero.
“Preference” does not mean the preferred claimant receives the promised sum regardless of available assets. It means where the claimant stands in the queue. A queue at an empty counter remains a queue.
Nor is a SAFE automatically a personal guarantee by the founder. Do not invent one from a disappointing result. Actual guarantees, secured debt, creditor claims and employment arrangements need their own analysis.
The compensation nobody put in this chart
A buyer may separately offer employment, retention payments or a new equity package. Those can be important. They should not be quietly added to acquisition proceeds to make the old capitalization look more generous.
Counsel also has to account for fees, withholding, escrow, taxes, deal consideration and the actual preferences in circulation. Our tool deliberately leaves those out and says so. It is for understanding priority, not calculating the amount your accountant will tell you to transfer.
Ask for three sale cases before signing the financing: one disappointing, one plausible and one excellent. If the investor insists the company will be too valuable for this paragraph to matter, keep the paragraph.
The founder built the company. That is why the buyer wants it. It is not how the waterfall decides who gets paid first.