SAFE versus note at conversion
The same money and cap as a SAFE and as a note, converted at Northwind's Seed.
The same $250,000, the same $5,000,000 cap, at the same Seed price — one as a post-money SAFE, one as a 6% note with a pre-money-style cap and a 20% discount.
Two effects pull in opposite directions. The note's interest converts too, adding shares. But its cap is divided by the shares before the round, without the note itself, which gives a higher price per share than the post-money SAFE's cap divided by a capitalization that already includes the SAFE. Here they nearly cancel; with a bigger note or a longer wait, the interest wins.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- US GAAP
- ASC 470-20 — Debt with Conversion and Other Options (opens in a new tab)A convertible note is debt until it convertsFree after registration
- Background reading — not an authority
- Y Combinator, Post-Money SAFE (Valuation Cap, no Discount), §2 (opens in a new tab)The Safe Price, and what Company Capitalization countsFree to read
The full map is in US GAAP, and where these rules come from.
The words this page teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- SAFECash from an investor in exchange for a right to shares in a future priced round, usually at a valuation cap or a discount. Not debt and not yet stock; because a SAFE can require cash on a change of control, it is often classified as a liability under ASC 480 and remeasured at fair value — the terms decide
- Convertible noteDebt that converts into stock at a future financing, usually at a discount or a cap, accruing interest until it does — a liability until conversion, with any embedded conversion feature assessed for separate accounting
- Valuation capThe highest valuation a SAFE or note converts at. On YC's post-money SAFE the Safe Price is the cap ÷ Company Capitalization, and the holder takes whichever of that or the round price issues more shares
See also
- SAFEA simple agreement for future equity. An investor pays now, and the SAFE converts into shares at your next priced round, usually at a valuation cap, a discount, or both. It carries no interest and no maturity date.
- Convertible noteA loan from an investor that converts into shares at your next priced round, usually with a valuation cap or a discount. Unlike a SAFE it's debt: it accrues interest and has a maturity date.