Source: https://guthlabs.ai/docs/instruments/safe-convertible-note-conversion-simple/mechanism/

instrument mechanism / verified-clean

# SAFE/Convertible Note Conversion (Simple) mechanism

The inspectable method record for SAFE/Convertible Note Conversion (Simple), kept separate from implementation and qualification.

Status: **VERIFIED_CLEAN**Lifecycle: **verified-clean**

## Model scope

The core arithmetic is standard only for a simplified lower-of-cap-price-or-discounted-round-price model. Before release, add fully_diluted_shares and an explicit ownership formula, define pre-money/post-money and capitalization treatment, specify discount encoding and validation bounds, define missing-cap or missing-discount behavior, and document share-rounding rules. The existing educational and not-investment/legal-advice label is appropriate but does not resolve these calculation ambiguities.

- The conversion-price formula is valid only under the explicit assumption that the lower of the valuation-cap price and discounted priced-round price governs conversion; actual SAFE and convertible-note terms may use different definitions and mechanics.

- The formula references fully_diluted_shares, but that input is missing from the declared input list.

- No formula is provided for the claimed resulting ownership % output. The illustrative formula shares/(fully_diluted_shares+shares) is not universally correct because capitalization, option pools, other convertibles, and pre-money versus post-money treatment may differ.

- The valuation-cap basis is ambiguous: cap/fully_diluted_shares requires the cap and fully_diluted_shares to be defined consistently, including whether the share count is pre-money, post-money, or includes an option-pool increase.

- The discount convention is ambiguous: discount% must be specified as a decimal fraction such as 0.20 or as a displayed percentage such as 20%, and the implementation must convert it consistently.

## Units and conventions

- valuation cap and priced-round valuation use the same currency units as the SAFE amount and share price.

- fully_diluted_shares is a share count, not a currency amount, and includes exactly the securities intended by the instrument's capitalization definition.

- priced-round share price is currency per share.

- discount% is represented as a decimal fraction in [0,1], so 20% is entered as 0.20.

- For the illustrative ownership outputs below only, resulting ownership is assumed to be shares issued/(fully_diluted_shares+shares issued), with no other capitalization changes.

## Inspectable vector

One of 4 source-bound review vectors:

````
{
  "inputs": {
    "safe_amount": 100000,
    "valuation_cap": 5000000,
    "discount": 0.2,
    "priced_round_share_price": 8,
    "fully_diluted_shares": 1000000
  },
  "expected_outputs": {
    "conversion_price": 5,
    "shares_issued": 20000,
    "resulting_ownership_percent": 1.9607843137
  },
  "working": "Cap price = 5,000,000 / 1,000,000 = 5.00 per share. Discounted round price = 8.00 x (1 - 0.20) = 8.00 x 0.80 = 6.40. Conversion price = min(5.00, 6.40) = 5.00. Shares issued = 100,000 / 5.00 = 20,000. Ownership = 20,000 / (1,000,000 + 20,000) = 20,000 / 1,020,000 = 0.019607843137 = 1.9607843137%."
}
````

## Failure boundary

- Division by zero occurs if fully_diluted_shares is zero while a valuation cap is supplied.

- Division by zero occurs if both valuation-cap pricing and discounted-round pricing produce a conversion price of zero, including a zero priced-round share price or a 100% discount.

- Negative or otherwise invalid valuation caps, share counts, investment amounts, share prices, or discounts are not constrained by the specification.

- A discount below 0% or above 100% is not constrained; values above 100% can produce a negative conversion price.

- If either the valuation cap or discount is omitted, the behavior of min() is unspecified even though the input description says cap and/or discount.

- Fractional shares, rounding rules, and any minimum-share increment are unspecified.

- Using shares/(fully_diluted_shares+shares) for ownership can misstate ownership when the SAFE is post-money, when the option pool changes, or when other securities convert.

## Other records

[01**Overview**](<https://guthlabs.ai/docs/instruments/safe-convertible-note-conversion-simple/>)[03**Implementation**](<https://guthlabs.ai/docs/instruments/safe-convertible-note-conversion-simple/implementation/>)[04**Qualification**](<https://guthlabs.ai/docs/instruments/safe-convertible-note-conversion-simple/qualification/>)

## Sources and evidence

These pointers bind the page to evidence. They do not grant authority or collapse verification into deployment.

- `VERIFIED_LEDGER.json`

- `evidence-tranche5/tranche5-results.json`