CaseMark Analyzing Convertible Instrument Terms
When To Use
- Reviewing a SAFE, convertible note, or KISS before a founder signs or an investor commits
- Comparing multiple convertible instruments across a cap table to assess aggregate dilution
- Modeling conversion outcomes at various pre-money valuations for an upcoming priced round
- Evaluating whether MFN provisions or pro-rata rights create conflicts across investor cohorts
- Advising on whether a valuation cap, discount rate, or hybrid structure best fits the deal context
Inputs To Gather
- Instrument documents: Full text of each SAFE, convertible note, or KISS (identify version — e.g., YC post-money SAFE 2018 vs. 2023 template)
- Instrument type and variant: Pre-money SAFE, post-money SAFE, convertible note (secured/unsecured), KISS (debt/equity variant)
- Economic terms: Valuation cap, discount rate (or both), interest rate and accrual method (notes only), maturity date (notes only)
- Key provisions: MFN clause scope, pro-rata rights, amendment/waiver thresholds, dissolution/liquidation waterfall priority
- Cap table context: Current outstanding shares, option pool size, any prior convertible instruments outstanding
- Anticipated round terms (if available): Expected pre-money valuation, round size, lead investor terms
Workflow
Classify each instrument
- Identify instrument type (post-money SAFE, pre-money SAFE, convertible note, KISS debt, KISS equity)
- Note the template version and any custom modifications from standard forms
- Flag if the instrument is a non-standard or bespoke structure
Extract and tabulate economic terms
- For each instrument, record: investment amount, valuation cap, discount rate, interest rate, maturity date, and MFN status
- For convertible notes: confirm whether interest is simple or compound, accrual frequency, and whether interest converts or is repaid [VERIFY: confirm accrual terms in instrument]
- Identify whether the cap is pre-money or post-money — this fundamentally changes dilution math
Analyze conversion mechanics
- Cap conversion: Shares = Investment ÷ (Cap ÷ fully-diluted capitalization at conversion)
- Discount conversion: Shares = Investment ÷ (Price per share × (1 − discount rate))
- Hybrid (cap + discount): Investor receives the more favorable of cap-based or discount-based conversion
- For post-money SAFEs: the investor's ownership percentage is fixed (Investment ÷ Cap), and dilution falls on founders and prior investors — not SAFE holders
- For notes with accrued interest: calculate total converting principal + interest at expected conversion date
Model conversion scenarios
- Run conversion at 2–3 representative pre-money valuations (e.g., $5M, $10M, $20M or as contextually appropriate)
- Show resulting ownership percentages for each investor and for founders post-conversion
- Identify the valuation at which the cap vs. discount "crossover" occurs (discount becomes more favorable than cap)
- For stacked instruments: model aggregate dilution from all converting instruments simultaneously
Evaluate protective and structural provisions
- MFN: Does it apply only to future SAFEs, or also to future convertible notes? Does it auto-trigger or require election? What is the notification mechanism?
- Pro-rata rights: side letter or built into the instrument? Based on pre- or post-conversion ownership?
- Amendment provisions: majority-in-interest threshold — by dollar amount or by holder count?
- Dissolution/wind-down: payment priority relative to other instruments and equity holders [VERIFY: confirm liquidation waterfall ordering if multiple instrument types]
Identify risks and flag issues
- Stacking risk: total SAFE/note overhang as a percentage of anticipated post-money valuation
- MFN conflicts: later instruments with better terms triggering MFN for earlier holders, compounding dilution
- Maturity risk (notes): what happens at maturity — auto-convert, founder repayment obligation, or default?
- Shadow preferred: SAFEs converting into a separate series with different rights than the lead investor's preferred stock
Output
Structure the analysis report as follows:
- Instrument Summary Table: One row per instrument — type, date, amount, cap, discount, interest rate, maturity, MFN status
- Conversion Modeling: Scenario table showing shares issued and ownership percentages at 2–3 valuations
- Cap vs. Discount Crossover: The pre-money valuation at which each instrument's discount becomes more favorable than its cap
- Aggregate Dilution Impact: Total founder dilution from all converting instruments at the most likely round valuation
- Provision Comparison: Side-by-side comparison of MFN scope, pro-rata rights, amendment thresholds, and dissolution treatment
- Risk Flags: Bullet list of material risks (stacking, MFN cascades, maturity exposure, structural conflicts)
- Recommendations: Specific, actionable guidance — e.g., "Negotiate removal of MFN from Investor B's SAFE before closing Investor C" or "Cap total convertible overhang at 25% of anticipated post-money"
Quality Checks
- Confirm whether each instrument uses pre-money or post-money cap mechanics — misclassifying this produces materially wrong dilution figures
- Verify that conversion math uses the correct fully-diluted share count (including or excluding the option pool, depending on instrument terms) [VERIFY: check instrument definition of "Company Capitalization" or equivalent]
- Cross-check that MFN analysis accounts for all outstanding instruments, not just the one under review
- Ensure interest accrual calculations on notes match the stated accrual method and compounding frequency
- Validate that scenario modeling uses consistent assumptions across all instruments (same pre-money, same option pool treatment)
- Flag any instrument that deviates from standard YC SAFE / 500 Startups KISS templates and note the specific deviations