A simple method of calculating the value of a convertible bond is to calculate the present value of future interest and principal payments at the cost of the debt and add the present value of the warrant. However, this method ignores certain market realities, including stochastic interest rates and credit spreads, and takes into account unpopular convertible features such as issuer views, investor bets, and conversion rate resets. The most popular models for evaluating convertibles with these characteristics are the models with finite difference, as well as the most common binomial and trinomial shafts. However, evaluation models based on Monte Carlo methods are also available.  SAFERs are generally easier to reconcile and trade than convertible bonds because they do not include maturity dates and interest rates. Since they can be continued indefinitely, there is no need to define when a conversion to actions is triggered. Since the effect of a valuation cap for SAFE and bondholders is that they pay a lower price per preferred share when their SAFE/note is converted into shares, this has the net effect of giving them a very generous liquidation preference – more liquidity for these early-stage investors and much less for founders/new VCs. If you`re a UK company raising money from an AMERICAN investor, chances are they`ll ask you for a SAFE. At first glance, it`s tempting to simply upload a free SAFE deal template from YC`s website, but you`ll quickly see that it won`t work for two main reasons: the net effect is to reduce the investment needs of future VCs, as they get a worse deal than SAFE/bondholders, which has a negative impact on the company`s financial situation over time. In addition, company founders are likely to find that their ownership of the company decreases as the impact of SAFE/ratings becomes clear as a new round of funding approaches. From the issuer`s point of view, the main advantage of raising funds through the sale of convertible bonds is a reduced payment of interest in cash. The advantage for companies to issue convertible bonds is that when bonds are converted into shares, corporate debt disappears. However, in exchange for reduced interest payments, the value of equity is reduced due to the expected dilution of shares, as bondholders convert their bonds into new shares.
One way to ensure that founders and investors truly understand the impact of issuing SAFE and convertible bonds is to get your lawyers to create a pro forma capitalization chart in advance. This table should clearly show the impact that these bonds (including discounts or valuation caps) will have on the percentage of ownership between founders and investors after conversion to shares – the post-monetary position. However, as we have seen, SAFE and convertible bonds are often issued with a valuation cap – the maximum valuation of the company used to convert the amount of the SAFE/note into company shares. The net effect of this is that these early-stage investors get a better price per share than investors in subsequent rounds, and therefore built-in dilution protection. In addition, certain debt and SAFE securities will be issued on a “most-favoured-nation” basis, allowing them to benefit from more favourable terms than future investors if more SAFE or convertible bonds are issued. Conditional convertible bonds are a variant of mandatory convertible bonds. They are automatically converted into equity when a predetermined triggering event occurs. B, for example, when the value of assets is less than the value of their secured liabilities. In finance, a convertible bond or convertible bond or convertible bond (or a convertible bond if it has a maturity of more than 10 years) is a type of bond that the holder can convert into a number of common shares of the issuing company or cash of equal value. It is a hybrid security with characteristics similar to those of debt and equity. It was born in the mid-19th century and was used by early speculators such as Jacob Little and Daniel Drew to counter market movements.  SAFERs and convertible bonds allow founders to defer valuation issues until a certain point in the future, when the company has a trading history on which a valuation can be based. The exact conditions of a SAFE vary. However, the basic mechanics is that the investor provides the company with a certain amount of financing when it is signed. In return, the investor will receive shares of the company at a later date as part of specific contractually agreed liquidity events. The main trigger is usually the sale of preferred shares by the company, usually as part of a future price cycle. Unlike a direct purchase of equity, shares are not valued at the time of signing the SAFE. Instead, investors and the company negotiate the mechanism by which future shares will be issued and postpone the actual valuation.
These conditions typically include a valuation cap for the company and/or a discount on the valuation of the stock at the time of the triggering event. In this way, the SAFE investor participates in the benefits of the company between the time of signing the SAFE (and the provision of the financing) and the triggering event. While convertible bonds are exclusively loans, start-ups are not supposed to repay them. On the contrary, the loan amount plus interest must be converted into equity at a certain time (e.g. B the next funding round) and on certain terms agreed in advance. Unlike convertible bonds, SAFERs are not loans, so they do not attract interest or have a maturity date by which they should be repaid. They allow investors to convert their financing into shares at some point in the future, based on the company`s valuation at that time (usually the next round of financing, often Series A). They can persist indefinitely, and investors have no control over how the business is run in the meantime. In short, convertible bonds are loan agreements that bear interest and are converted into equity at some point in the future, and SAFEIs are contracts that give investors the right to buy shares up to the amount of their investment if another round of financing takes place….