How a SAFE Note Converts at a Valuation Cap
A SAFE note converts into equity at the lower of two calculated prices: the cap based conversion price and the discount based conversion price. The cap based price is what the investor would have paid per share if they had invested at the valuation cap rather than the priced round valuation. The discount based price is the priced round price per share reduced by the discount rate. Both are calculated at conversion. The lower of the two applies. Most SAFE notes do not convert at the priced round's valuation.
A company that models SAFE conversion at the face value of the priced round is understating dilution. The difference between cap based and priced round conversion can be material at Seed and Series A valuations, and the correctly modeled figure is what a lead investor's legal team will calculate independently during the legal process.
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