Converting SAFEs and CNs: A Numerical Illustration

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Key Takeaways

  • SAFEs and CNs are the 2 most common alternatives to priced equity rounds for company fundraising
  • The key features of SAFEs and CNs include: valuation cap; discount rate; interest rate; and conversion type/calculation
  • The dilutive effects of SAFEs and CNs are reversed between a single-note conversion and a multi-note simultaneous conversion
  • In general, it is not advisable to accumulate too many notes for simultaneous conversion, due to the risk of snowballing dilutive effects on the company's founders and existing investors


There are several methods companies typically use for fundraising.  Besides a priced equity round, the most common alternatives are convertible instruments (also known collectively as “notes”).  In one of Svested’s previous articles, we introduced the concept of Simple Agreements for Future Equity (SAFEs).  In today’s article, the third in our new CapTable series, we aim to provide a deeper understanding of Convertible Notes (CNs) and SAFEs, including numerical illustrations on how these convert to equity shareholdings.

Key definitions

Notes are assets which can be converted into company shares.  Typically, noteholders promise a company a sum of money, and agree to convert their notes into shares at a later stage – such as the company’s next priced equity round.  Notably, unlike regular priced round investors, there is far less administrative hassle for noteholders – in terms of the time taken for an agreement to be reached, and for the noteholder to become the company’s investor, the duration can be as short as 1 day, compared to anywhere between 3 and 6 months for priced round investors.  This article will focus on the 2 most common notes issued: CNs and SAFEs.

CNs vs SAFEs

A traditional CN is usually an interest-bearing debt instrument which converts to equity by a certain maturity date.  Until equity conversion occurs, or until the company repays the noteholder, the CN will continue to accrue interest.  As with all other contracts, CN can be amended, as long as both the noteholder and the company agrees.  The conversion of these notes to equity is normally done on a pre-money basis

SAFEs – short for “Simple Agreement for Future Equity” – are warrants rather than debt instruments.  As such, SAFEs do not have maturity dates or interest attached to them, nor is there a repayment obligation borne by the company.  Unlike traditional CNs, SAFEs are typically converted on a post-money basis.  For a more detailed insight into how SAFEs work, see our previous article, What Is A SAFE.  As for further discussion on what “pre-money” and “post-money” entail, look out for the next article in our CapTable series.

There are several common features between CNs and SAFEs.  Both notes typically come with a discount rate, as well as a valuation cap, as added benefits to noteholders for having made their investment earlier in the company’s life.  These 2 elements collectively act as a price ceiling (relative to the price per share offered to priced round investors), which is applied when CNs or SAFEs get converted into equity.

To firstly illustrate discount rates, let’s say that the equity investors for a priced round get their shares at $5 a piece, while the CNs and SAFEs to be converted in this round all come with a 20% discount and a valuation cap.  This would mean that the noteholder must receive shares at a price of no more than $4 per share (Max : $4 = $5 ⨉ 0.8).  The average discount rate for notes is approximately 20%, but can range between 10% and 30%.

Valuation caps also limit the maximum price noteholders pay for their shares, albeit in a slightly different way.  Consider a company which has just raised its Series B round, at a post-money valuation of $20 million.  During the fundraising round, it converted a SAFE with a valuation cap of $15 million.  What this means is that the amount invested by the noteholder would have been converted into equity as though the company was still valued at $15 million.  Alternatively, we can view this as the noteholder receiving a share price that is $15 million / $20 million = 75% of the price offered to price round investors – or that the noteholder is receiving a 25% discount on their price per share.  The corollary to a price ceiling is that noteholders also receive more shares, and enjoy a higher percentage shareholding.

At this point, one might ask why CNs and SAFEs have both a discount rate and a valuation cap.  The answer lies in how, generally, when a conversion takes place, the notes will convert either at a discount or valuation cap, depending on whichever grants a lower price per share.  Typically, for a company which has attained a valuation much higher than the stipulated valuation cap, then this valuation cap is used to convert noteholders’ CN or SAFE into equity.  On the other hand, if, at the point of its next priced round, the company’s valuation remains lower than or similar to the stipulated valuation cap, then the discount rate of the relevant note is more likely to be applied instead.

Moving on to the differences between the two notes, apart from how CNs are debt securities (with a maturity date and interest) while SAFEs are warrants, we can also consider the notes’ respective dilutive effects on the company’s founders and other existing stakeholders.  When there is only 1 note for conversion, SAFEs cause less dilution to existing stakeholders, and are a better choice.  On the other hand, where there are multiple notes for simultaneous conversion, having multiple SAFEs will now create more dilution than the same number of CNs.

The reason for this lies in the conversion calculation – aka pre-money or post-money – for each instrument.  While CNs typically convert pre-money, SAFEs instead convert post-money.  Let us illustrate the effect of this difference numerically below.  Do note that this is a simplified example – for more comprehensive examples, they will come 2 articles later.

Case 1: Single SAFE or Single CN

Companies A and B both have a post-money valuation of $25 million, raising $5 million in their upcoming priced rounds.  Company A has a SAFE note to convert, while Company B will be doing the same, but for a CN.  The details of the notes are as follows:

Based on these terms, assuming the company closed a price round at exactly the 1-year mark, post-conversion, the percentage shareholdings granted for each category of investor are as follows:

(a) Valuation cap conversion: $10M / 0.8 = $12.5M;
(b) Post-money valuation for priced round = $25 million;
(c) Valuation cap is used for calculation, because the discount rate given by valuation cap exceeds the stipulated discount rate of the notes

In this single-SAFE/single-CN example, for Company A (converting SAFE), its founders are left with a 100% – 20% – 20% = 60% share ownership, whereas in Company B (converting CN), its founders are left with a 100% – 20% – 21.57% = 58.43% share ownership.  In this single-note case, the dilution to founders and existing investors from SAFE is less.

Case 2: Multiple SAFE or Multiple CN

The reverse is true, however, when there are multiple notes to be converted in a single round.  Let us now have the same set up, except that there are 2 SAFEs (for Company A), and 2 CNs (for Company B), with all other details being the same, the dilution created by each category of investors will be as follows:

In this latter example, for Company A (converting SAFE), the founders and existing investors will be left with a 100% – 40% – 20% = 40% stake, whereas for Company B (converting CN), the founders and existing investors will still have a 100% – 35.48% – 20% = 44.52% stake.  As can be seen, the dilutive effects are now worse when dealing with multiple SAFEs, compared to the case with multiple CNs.  

This necessarily explains why it is recommended that once a company issues 1 round of SAFE, they should follow this up as soon as possible with a priced equity round to convert the SAFE, in order to avoid snowballing dilutive effects, when multiple SAFEs are to be converted at once.


Notes are the key alternative to priced equity rounds, and are used by companies looking to raise funds as fast as possible. The 2 most common notes issued are: CNs and SAFEs. There are several elements which founders must take into consideration when converting notes into equity, such as the choice between the discount rate and valuation cap approach, pre- or post-money conversion terms, as well as the interest rate applied to the note. At the same time, founders should be cognisant of the dilutive effects for each note, and how these differ between having single and multiple notes for simultaneous conversion. However, in general, it is not wise for founders to accumulate too many notes to be simultaneously converted in a single fundraising round, as this may cause founders to lose their majority stake in their own company.