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Intuition - Part 3/4: How to make NOTE and Post-SAFE economically behave the same?

Posted by  Rajesh Gopi   on April 11 2022



This is part 3 of a 4 part series.


Read this and this articles to understand the math behind a Post-SAFE and Convertible NOTE conversions.


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.



Setup: An example cap table

We will use the following cap table scenario.


Cap Table


Founders 3M shares
Options 1M shares
Fully Diluted 4M shares


Convertible Note

Valuation Cap $6M
Investment $100K
Shares Issued 66,667 shares
Ownership on conversion 1.667%




Valuation Cap ?
Investment $100K
Desired Shares Issued 66,667 shares



Priced Round

Pre-Money Valuation $8M
PPS $8M / 4M = $2.00



What is the Valuation Cap equivalent on a Post-SAFE to match a Convertible NOTE?

For our example instance, the math is easy.


Equivalent Post-SAFE


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.



How can TWO12 help?

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.


TWO12's equity platform helps founders model multiple scenarios and compare the outcome. Our customers answer these types of questions in under 30 seconds rather than spend weeks on legal fees or unproven spreadsheets. Head over to https://two12.co to learn more.


Topics: cap table, Convertible Note, Post-SAFE