This is part 3 of a 4 part series.
It is important to recognize that these articles are to pull the intuition for how these instruments convert.
As seen in the previous articles, for a given valuation cap, a Post-SAFE creates more dilution compared to a NOTE.
So, the question founders run into is what it would take to take investments in either a Post-SAFE or a NOTE and yet make them economically behave the same.
We’ll start with the example from the previous articles and look at how to arrive at this.
Geek Alert: This series of articles are numeric in nature.
We will use the following cap table scenario.
|Fully Diluted||4M shares|
|Shares Issued||66,667 shares|
|Ownership on conversion||1.667%|
|Desired Shares Issued||66,667 shares|
|PPS||$8M / 4M = $2.00|
For our example instance, the math is easy.
|Desired Post-SAFE Ownership||66,667 / (4M + 66,667) = 1.639344%|
|Desired Valuation Cap on Post-SAFE||$100K / 1.639344% = $6.1M|
So, to match a $6M cap Convertible NOTE, the valuation cap on the Post-SAFE should be higher at $6.1M.
This is a very simple set of examples to understand the intuition behind the math used by different instruments and explore ways to structure deals to have equivalent economic benefit.
In reality, this will rarely be the case.
Convertible NOTEs have interest components, different conversion triggers, and liquidation multipliers. Additionally, there may be Warrants and Options created / increased between rounds that can further change the math.
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