IGNITE EXTENDED / LESSON 33
What does each conversion term do to price and shares?
A conversion schedule with definitions, scenarios and a full denominator.
A convertible note begins as a contractual debt instrument that can convert into equity under specified conditions. Interest, maturity, conversion triggers and repayment provisions can matter. A SAFE is a different contractual instrument and should not be described as interchangeable debt.
The source places these instruments on a spectrum between debt and equity. The name of the instrument is insufficient to determine the result. The actual definitions describe when conversion occurs, which amount converts and how the price and ownership basis are calculated.
A conversion discount provides a price below the qualified round’s price under the agreed formula. A lower price gives the same converting amount more shares. The discount percentage is applied to price, not added directly to the holder’s ownership percentage.
Separate the converting principal and any accrued amount from the price calculation. Then calculate new shares and the enlarged denominator. The final ownership also depends on the new money and other securities issued at that event.
If these are the applicable alternatives, $1m converts at $6 into approximately 166,667 shares. Actual definitions can change the calculation.
1,000,000 founder shares; a $750,000 note (principal plus accrued interest) with a $6,000,000 pre-money cap, 20% discount and $2,000,000 minimum conversion size; a $4,000,000 Series A for 40%. The question: what is the cap table after the Series A?
Every input needed to derive the cap price is here: a pre-money cap divided by 1,000,000 pre-financing shares gives $6 per share. Accrued interest is part of the converting amount, which is one way a note differs from a SAFE.
Annotated terms: the cap fixes a $6 conversion price; the discount gives 80% of the Series A price; the holder converts at whichever is lower. The cap binds when 0.8 × P(A) > $6, i.e., P(A) > $7.50. A Series A above the $2M minimum triggers automatic conversion.
The $7.50 threshold is the single number that separates the two regimes. The minimum-conversion-size clause is why a small bridge round would not force conversion.
Two columns: below the cap the holder receives $750,000 / (0.8 × P(A)) shares, worth a fixed $937,500 at the Series A price; above the cap it receives 125,000 shares, worth 125,000 × P(A). At P(A) = $7.50 both give $937,500.
In the discount regime the holder's stake is worth a constant 1.25× the converting amount whatever the price. In the cap regime its value rises with the price, which is what makes the cap the valuable term in a strong round.
A valuation cap supplies another conversion-price mechanism. In many examples the investor receives the more favorable applicable price, but the result must follow the instrument’s actual terms. A cap is not simply a promise that the whole company has one fixed value.
The source’s worked examples compare next-round values above and below the cap mechanism. The capitalization definition matters because the cap-derived share price depends on which shares and instruments enter the calculation. Pre-money and post-money definitions can produce materially different ownership.
Build the conversion table in a deliberate sequence: the amount converting, each applicable price, the selected price, shares issued and the post-financing fully diluted total. Include the new round and pool changes on the same agreed basis.
A circular calculation can appear when the cap definition includes other converting interests. Do not resolve that by silently using an arbitrary denominator. Express the terms algebraically or use a model that implements the actual definitions, then test scenarios around the cap crossover.
At P(A) = $7.50: founders worth $7,500,000, the note's shares $937,500, the Series A $4,000,000; total post-money $12,437,500. The slide then asks whether this Series A lands above or below the cap: below.
Converting the price threshold into a post-money valuation lets you decide the regime from the term sheet alone: a $4M for 40% round implies a $10M post-money, under $12.4375M, so the discount binds.
Post-money $10M; total shares 1,975,309; Series A price $5.0625 ($10M / 1,975,309, shown as $5.06); conversion price 80% of that, $4.05; note holders get 185,185 shares (9.375%), founders 50.625%, Series A 40%.
The share count and the price are solved together because the note's shares enter the denominator that sets the price. When the discount binds the holder owns $750,000 / (0.8 × $10M) = 9.375% exactly, a useful check on the algebra.
Note holders get $750,000 / $6 = 125,000 shares; total 1,406,250 shares; Series A buys 281,250 shares at $20M / 1,406,250 = $14.22; ownership: founders 71.11%, note holders 8.89%, Series A 20%.
The note's share count is fixed before the round is priced, so no circularity arises. The holder pays $6 for shares the Series A buys at $14.22, an effective 58% discount, and that gap grows with the round price.
Y Combinator introduced the SAFE in late 2013 as a pre-money instrument and released the post-money SAFE (version 1.0) on 28 September 2018. YC currently publishes three post-money versions for US companies and an optional pro rata side letter.
YC's user guide states that the Safe Price equals the post-money valuation cap divided by Company Capitalization. It includes all issued capital stock, issued options and promised options, the unissued option pool and converting securities including all SAFEs and notes. It excludes the equity financing's new money and any pool increase made in connection with it, except to cover promised options.
Because the cap is measured after all SAFE money, purchase amount ÷ cap gives the holder's ownership before the priced round. SAFEs do not dilute each other; founders absorb each new SAFE. In a sale before conversion, the holder takes the greater of its purchase amount or its as-converted amount.
Sources: Y Combinator: Safe financing documents · Y Combinator: Post-money safe user guide · Torys: Pre-money versus post-money SAFE (2021)
Illustrative conversion: $1m converts, with no accrued interest. The qualified round price is $10, the discount is 20%, and the note has a $6,000,000 pre-money valuation cap defined over the 1,000,000 shares outstanding before conversion and new money. Assume the agreement selects the lower applicable price. Before conversion and new money there are 1m shares. The new investor purchases 500,000 shares. No other pool or instruments apply.
Find the conversion price, shares issued, final fully diluted total and each party’s ownership. Derive the cap price from the cap definition, then recompute the shares if the same $6,000,000 cap were post-money and included the converting shares.
In month 2 Relay raised $1,500,000 on a post-money SAFE with a $12,000,000 valuation cap and no discount. Before the SAFE the company had 10,000,000 founder shares and a 1,000,000-share option pool, 11,000,000 in total. In month 16 Relay raised a $4,000,000 seed at $16,000,000 pre-money ($20,000,000 post), with the unallocated pool topped up to 10% post-money inside the pre-money. Granted options were then 400,000. An angel now asks whether a pre-money SAFE or a convertible note would have been better for the founders.
A conversion schedule: the SAFE's ownership, shares and price derived from the cap definition; the seed cap table after conversion; and a side-by-side comparison with a pre-money SAFE and a convertible note on the same $1.5M (illustrative terms).
$1.5M / $12M = 12.5% applies to a capitalization that already includes the SAFE's shares; applying it to the 11,000,000 pre-SAFE shares gives 1,375,000 shares and understates the holder's stake by 196,429 shares.
$1,500,000 / $0.9545 = 1,571,503 shares, 74 more than the 1,571,429 the cap definition implies. Compute shares from the unrounded price and apply the rounding rule in the financing documents only at the end.
Each additional post-money SAFE dilutes the founders and pool only; three $1M SAFEs at a $10M post-money cap leave founders at 70% before the priced round, however the order or timing.
Relay's SAFE conversion schedule with derived cap price, seed cap table, and a comparison of post-money SAFE, pre-money SAFE and convertible note outcomes.
Next lesson: Funding needs, milestones & due diligence
Check your understanding
Question 1
Relay sells a $1.5M post-money SAFE at a $12M cap. Company Capitalization before the SAFE is 11,000,000 shares and includes the option pool. How many shares will the SAFE convert into at a priced round above the cap?
Post-money means 12.5% of a capitalization that includes the SAFE: S = 0.125 × 11,000,000 / 0.875 = 1,571,429. 1,375,000 ignores the SAFE's own shares; 1,571,503 divides by a price already rounded to $0.9545; 1,733,333 is the pre-money SAFE result.
Question 2
Six months later Relay raises another $500,000 on the same $12M post-money SAFE terms. What happens to the original SAFE holders' 12.5%?
Each post-money SAFE buys purchase amount / cap of a capitalization that counts all SAFEs. Total SAFE ownership is $2M / $12M = 16.7%, and the existing holders bear all of the extra dilution. Under a pre-money SAFE, SAFE holders would dilute each other.
Question 3
Relay's seed price was $1.1695 and its SAFE cap price $0.9545. If the SAFE had also had a 20% discount and the agreement gave the lower price, which price would apply?
The cap gives a price 18.4% below the seed price, so a 20% discount is more generous. Solving the circular seed math gives a seed price near $1.166 and a conversion price near $0.933. Discounts apply to the round price, never to the cap price.
Question 4
A $1.5M convertible note at 6% simple annual interest converts after 14 months at a cap price of $0.9545 (unrounded $0.954545...). How many shares does it receive?
The converting amount includes accrued interest: $1,500,000 × (1 + 0.06 × 14/12) = $1,605,000. Divided by $0.954545 that is 1,681,429 shares. Ignoring interest gives the SAFE's 1,571,429; 1,605,000 confuses dollars with shares.
Question 5
After Relay's seed, the SAFE holders own 9.19%, not the 12.5% their SAFE promised. A SAFE investor asks why. Which answer is correct?
YC's post-money SAFE measures ownership after all SAFEs but before the equity financing; new money and pool increases are excluded from Company Capitalization. 12.5% × 12,571,429 / 17,102,041 = 9.19%. The cap did apply ($0.9545 < $1.1695).
Question 6
Maya is choosing between a $10.5M pre-money SAFE and a $12M post-money SAFE for $1.5M. A founder friend says they are the same deal because 10.5 + 1.5 = 12. When is that true?
The two give the same price when both capitalizations match. The pre-money SAFE excludes other SAFEs and includes the seed's pool top-up, so in Relay's seed it gives SAFE holders 10.00% versus 9.19%. More SAFEs or a bigger pool widen the gap.
Workbook
Module output: A capital strategy, cap table, financing comparison and milestone-based funding plan.
Sources
Original pages and full documents are in the Library edition.