Convertible Notes and SAFE Conversion at IPO Pricing

Convertible notes and SAFEs (Simple Agreements for Future Equity) must be resolved before or at IPO. The three resolution paths are: Conversion at the Qualified Financing Trigger — most notes and SAFEs convert automatically upon a qualified equity financing above a threshold size, typically defined in the instrument. If the IPO itself qualifies, conversion occurs at the IPO price (with the applicable discount and/or valuation cap applied). Cash Repayment — if the instrument includes a redemption right and the company has sufficient cash, it can repay the note principal plus accrued interest. This is rarely optimal for pre-IPO companies conserving cash for growth. Negotiated Settlement — in cases where automatic conversion at IPO would produce wildly dilutive outcomes (e.g., a SAFE with a very low valuation cap relative to the IPO price), the company negotiates a capped conversion or a combination of partial conversion and partial cash settlement. The accounting impact must be modelled early — SAFE conversion at a price far below the IPO price produces a significant non-cash accounting charge that flows through the income statement in the period of conversion.