Safes (and other convertible securities) convert at the cap, assuming the round valuation is higher than the cap. Where there are safes with multiple caps there are a number of methods that the lawyers use so that investors receive the correct number of shares, while solving for your point about the excess liquidation preferences.
The simplest one is that there are multiple sub classes of preferred stock ("shadow series") - eg for a Series A, there are Series A-1, Series A-2 shares that represent each cap. These classes each have their own liquidation preferences matched to the dollars put in originally. The YC-standard safe also contemplates this by referring to "safe preferred shares".
Another option is that the "extra" shares that the converting safeholders receive as a result of the difference between the conversion price and round price are given as common shares (which have no liquidation preference).
Thanks for the response Kristy. You are absolutely correct that there are ways to fix these problems if you have good lawyers (and leverage). But in my experience this rarely happens. Conversely, I see the default conversion into the same new share class all the time (as a result of negotiation leverage or just because nobody involved knows any better). How does that compare to your observations with your obviously much larger portfolio? For example, what percentage of yc companies using SAFE did the pref+common conversion that you described?
Of course the other concern is that you actually have to be cognisant of this issue - or have a lawyer who is - to catch it. Maybe the SAFE could just mandate the pref+common conversion?
At Series A, you are talking about a lot more money and a lot more company history. So VCs have an incentive and the information to price and negotiate terms. And at that point, it's best to have a good startup lawyer on your side of the table because the terms will be many. A Safe is like training wheels for the complexities Series A will bring.
Really, no one has said it, but one of the few remaining competitive advantages of Silicon Valley is the legal talent available here. While I read Venture Hacks and Brad Feld as much as anyone, I'll get a good lawyer when/before I get to A.
Similarly, LLC's can be a simple stepping stone to Delaware C. Also, provisional patents are a stepping stone to a full application. Along with Safes, these allow people to move forward without the complexity and cost of completeness.
The simplest one is that there are multiple sub classes of preferred stock ("shadow series") - eg for a Series A, there are Series A-1, Series A-2 shares that represent each cap. These classes each have their own liquidation preferences matched to the dollars put in originally. The YC-standard safe also contemplates this by referring to "safe preferred shares".
Another option is that the "extra" shares that the converting safeholders receive as a result of the difference between the conversion price and round price are given as common shares (which have no liquidation preference).