Define: Converting Securities

What Converting Securities Means in a Contract

Converting Securities is a defined term used primarily in Safe agreements and other early-stage financing documents to describe the full universe of instruments that a company has issued which are capable of converting into shares of Capital Stock. Rather than listing every possible instrument each time, drafters use this single defined term as shorthand so that the mechanics of conversion, priority, and dilution can be described consistently throughout the contract.

The term matters because startups often raise money through several rounds using different instruments, such as a Convertible Agreement in one round and a promissory note in another. When a triggering event such as an equity financing, acquisition, or dissolution occurs, all Converting Securities are usually valued and converted together, so the term acts as the anchor for calculating how much of the company each investor ultimately owns.

In practice, Converting Securities is not a standalone right or obligation, it is a definitional building block. Its purpose is to make later provisions, such as conversion price, pro rata calculations, and priority of payment, function correctly by clearly identifying which instruments are included in those calculations.

How Converting Securities Is Defined or Measured

The definition typically captures three broad categories. First, other Safes issued by the same company, since multiple Safes are commonly issued to different investors over time on similar terms. Second, convertible promissory notes and other convertible debt instruments, which are debt obligations that carry the right to convert into equity rather than being repaid in cash. Third, any other convertible security that carries a contractual right to convert into shares of Capital Stock, a catch-all designed to capture instruments not specifically named.

Measurement is not about assigning a numeric value within the definition itself, but about identifying scope. The definition determines which instruments are swept into later formulas, such as calculating the total number of shares issuable upon conversion or determining the order in which instruments convert relative to one another. Because the definition is inclusive rather than exhaustive, companies should track every instrument they issue and confirm whether it falls within the definition's language.

• Other Safes issued at different valuation caps or discount rates
• Convertible promissory notes with stated interest and maturity terms
• Warrants or other rights that convert into equity upon specified events

Where Converting Securities Appears in Agreements

The term most commonly appears in Safe agreements, where it is used in provisions governing conversion mechanics, most favored nation clauses, and pro rata rights. It also appears in related instruments such as a Convertible Loan Note, where the parties need to know how the note interacts with other outstanding convertible instruments upon a financing event.

Beyond direct financing documents, the concept can surface in due diligence checklists, capitalization table summaries, and disclosure schedules attached to a broader investment agreement. Investors and their counsel review the list of Converting Securities to understand the company's fully diluted ownership picture before agreeing to invest further.

It may also be referenced indirectly in debt-related documents, such as a Promissory Note, when that note includes an option to convert into equity and therefore needs to be reconciled with other convertible instruments already on the company's books.

Why the Exact Wording Matters

Because Converting Securities determines what gets included in conversion and dilution calculations, imprecise wording can materially change an investor's eventual ownership stake. If the definition is too narrow, some instruments might be excluded from a pro rata conversion event, unfairly benefiting certain holders. If it is too broad, it might sweep in instruments that were never intended to be treated the same way, such as employee equity incentives.

The exact wording also affects how the instrument interacts with the law governing the contract, particularly around priority of payment in an insolvency or wind-down scenario. Ambiguity here can lead to disputes among investors, or between investors and the company, about the order and amount of conversion.

Precise drafting also matters for consistency across a company's full set of financing documents. If one Safe defines Converting Securities differently than another, reconciling the cap table becomes far more complicated and can create conflicting rights among investors holding otherwise similar instruments.

Drafting Considerations

Drafters should ensure the definition is broad enough to capture all instruments the company reasonably expects to issue, while still being specific enough to avoid unintended inclusions. It is good practice to cross-reference the definition against the company's actual capitalization table and any existing debt instruments, including any past use of a Debt Settlement Agreement that might have altered the terms of previously issued convertible debt.

Companies raising funds through convertible notes should also consider how the definition interacts with maturity dates and interest accrual, since unresolved notes may still be outstanding when a later conversion event occurs. Founders exploring convertible financing more broadly may find it useful background reading to review guidance on how to structure early fundraising, such as approaches described in resources about raising funds with convertible notes.

Finally, parties should confirm that the definition is updated consistently across amendments and subsequent financing rounds, since a stale or inconsistent definition of Converting Securities is a common source of confusion during due diligence and later equity events.