Conversion
When a SAFE or convertible note transforms into actual equity shares at a priced round.
Definition
Conversion is the event where SAFEs or convertible notes transform into equity (usually preferred stock) at a priced funding round. The number of shares received depends on the conversion price, which is determined by the valuation cap, discount rate, or the round price, whichever gives the SAFE or note holder the best deal. Conversion happens automatically upon a qualifying financing event.
Why it matters
Conversion is when the theoretical dilution from SAFEs and notes becomes real. Until conversion, the exact dilution is unclear. At conversion, you can see exactly how many new shares are created and how much your ownership percentage dropped.
Example
A company has $1.5M in SAFEs at a $10M cap. The Series A prices at $25M. The SAFEs convert at the $10M cap, creating shares worth 15% of the pre-money cap table. If the round had priced at $8M, the SAFEs would convert at the $8M price instead.