What happens if the Company is sold before the convertible note or SAFE converts?
Takeaway: In an acquisition before a priced round, convertible notes and SAFEs typically provide that the holder will automatically receive whichever outcome—cash repayment or conversion—yields the greater financial return.
A common question from both founders and early-stage investors is what happens if the company is acquired before it has raised a formal priced round of financing. Convertible notes and SAFEs are designed to convert into the preferred stock sold in a future round, but if that round never happens, their agreements specify how investors are treated in a sale.
How Investors Are Treated
In most cases, the instrument will automatically provide the investor with the greater of two outcomes:
1. Repayment with a Premium (Downside Protection)
The holder is entitled to repayment of their original investment, sometimes with a multiple (e.g., 1.5x or 2x).
This protects investors in a small or modest acquisition by guaranteeing a return of capital that may be more favorable than converting into a small slice of equity.
2. Conversion to Equity (Upside Participation)
Alternatively, the instrument may convert into common stock immediately before the acquisition closes, using the valuation cap in the note or SAFE to set the conversion price.
This ensures that in a larger acquisition, the investor shares in the upside rather than being limited to a capped cash payout.
Convertible Notes and SAFEs
The standard Y Combinator post-money SAFE follows this same approach: in a change of control before a priced round, the SAFE automatically provides the investor with whichever treatment—cash-out or conversion—delivers the higher return. This streamlined mechanism eliminates the need for an investor election and ensures the outcome is always economically optimized for the holder.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.