# Accounting for convertible notes, SAFEs and warrants

Canonical: https://finbryn.com/us/services/technical-accounting-advisory/convertible-notes-safes-warrants-accounting

Finbryn provides accounting analysis for convertible notes, SAFEs and warrants for startup finance teams: classification memos under ASC 480, ASC 470-20 and ASC 815-40, conversion schedules and journal entries. Checked 2026-10-16: ASU 2020-06, effective for private companies from fiscal years beginning after December 15, 2023, removed the beneficial conversion feature model.

Early-stage money arrives on paper that was written to close quickly: a SAFE, a convertible note, a warrant attached to a bridge. The accounting comes later, usually when the first audit starts or a buyer's diligence list asks how each instrument is recorded. The answer isn't in the term sheet. It sits in three parts of the Codification, ASC 480 for liabilities and equity, ASC 470-20 for convertible debt and ASC 815-40 for contracts in a company's own equity.

Finbryn prepares the analysis, schedules and draft disclosures for management to review and adopt. Management owns the conclusion and the company's auditor decides whether it is acceptable. Embedded feature and warrant values come from management, its valuation specialist or a separate reporting valuation engagement, and Finbryn issues no valuation opinion. Finbryn gives no legal advice on instrument terms.

The first deliverable is a term sheet of every outstanding instrument, with only the clauses that change the accounting: conversion price mechanics, cash payout rights, settlement options and anti-dilution protection. The second is the classification memo, one per instrument type. The third is the schedule that rolls each balance forward and the entries that book a conversion in the next priced round. Each memo names the Codification paragraphs it applies, so the auditor can check the reasoning in one sitting.

Stock options and RSUs aren't covered here; they follow ASC 718 on the [stock compensation page](/services/technical-accounting-advisory/stock-compensation-asc-718-ifrs-2). For the written analysis format your auditor expects, see [accounting position papers and technical memos](/services/technical-accounting-advisory/technical-accounting-memos-position-papers). Cap table and data room preparation sit with the [fundraising data room guide](/guides/fundraising-finance-data-room).

What you get: Term sheet of every instrument with the clauses that drive classification; Classification memo under ASC 480, ASC 470-20 and ASC 815-40; Fair value roll-forward for instruments carried at fair value; Conversion and extinguishment journal entries; Draft convertible instrument and fair value disclosures

Software we work in: Carta, Pulley, Microsoft Excel, QuickBooks Online

## Is a SAFE a liability or equity?

Start with what a SAFE is. Y Combinator's own FAQ describes it as not a debt and not a loan, with no interest and no maturity date, and says it isn't stock until it converts into preferred shares in an equity financing. So debt accounting under ASC 470 isn't the usual starting point. The analysis runs in order: is the SAFE a liability under ASC 480; if not, is it a derivative under ASC 815; and if it might still be equity, does it pass the ASC 815-40 indexation and settlement conditions.

As of 2026-10-16 we found no FASB Update or Codification paragraph that names the SAFE, so the analysis applies general guidance to the terms of each agreement. The terms that move the answer:

| Term in the SAFE | Why it matters | Where to look |
| --- | --- | --- |
| Converts into a variable number of shares at a discount, a valuation cap or both | An obligation the issuer must or may settle in a variable number of its shares is a liability if, at inception, its monetary value is based solely or predominantly on a fixed amount. A discount points that way; whether a capped SAFE's value is predominantly fixed is a judgment on its terms | ASC 480-10-25-14, from FASB Statement 150, paragraph 12 |
| Cash payout on a liquidity event (the valuation cap version pays the greater of the purchase amount or the as-converted amount) | A provision that could require net cash settlement precludes equity, unless the cash can only be triggered when holders of the underlying shares also receive cash | ASC 815-40-25-7 and 25-8 |
| Events outside the company's control that could trigger cash | The likelihood of the event isn't considered, except that a payment required only on final liquidation of the company need not be considered | ASC 815-40-25-9 |
| Junior to debt, ranks like non-participating preferred | Relevant to fair value, less so to classification | YC SAFE FAQ |

If the SAFE is a liability, [Statement 150](https://storage.fasb.org/aop_fas150.pdf) (paragraph 24) has instruments in its scope measured subsequently at fair value with changes recognized in earnings, unless other guidance specifies another measurement attribute. If it is equity, it stays at its issue amount until conversion. Different readings of the same terms exist in practice, so the memo sets out the terms, each test applied and the conclusion, and the auditor tests it.

## How do convertible notes work after ASU 2020-06?

[ASU 2020-06](https://storage.fasb.org/ASU%202020-06.pdf) cut the number of models for convertible debt. Where the conversion feature isn't a derivative under ASC 815 and doesn't create a substantial premium recorded in paid-in capital, the feature is no longer separated from the host. The note is a single liability at amortized cost. Separation remains for features that are not clearly and closely related to the host, meet the definition of a derivative and don't qualify for a scope exception.

The Update took effect for private companies and smaller reporting companies for fiscal years beginning after December 15, 2023 (larger SEC filers adopted two years earlier), with early adoption allowed from fiscal years beginning after December 15, 2020. Companies could adopt on a modified retrospective or full retrospective basis. Diluted EPS now uses the if-converted method for convertible instruments.

When a note converts in accordance with its terms, ASC 470-20-40-4 has the carrying amount, including unamortized discount and issuance costs, credited to the capital accounts, and no gain or loss recognized.

Sweeteners are a separate case. [ASU 2024-04](https://storage.fasb.org/ASU%202024-04.pdf) clarifies when changing the terms to induce conversion is an induced conversion: the offer must give the holder at least the consideration issuable under the original conversion terms. It applies to all entities for annual periods beginning after December 15, 2025, and early adoption requires ASU 2020-06 first.

## When does a warrant need liability treatment?

ASC 815-40 asks two questions: is the warrant indexed to the company's own stock, and does it meet the conditions for equity classification? Both must be yes. Failing either one puts the warrant on the balance sheet as an asset or liability at fair value, with changes through earnings.

The settlement test is where startup warrants fail. A provision that could require net cash settlement blocks equity treatment unless holders of the underlying shares also would receive cash (815-40-25-7). ASU 2020-06 trimmed this part. It removed the conditions on settling in unregistered shares, posting collateral and shareholder rights, and clarified that penalty payments for failing to file timely don't preclude equity classification.

Down round features, where the strike price drops if the company later sells shares at a lower price, used to force liability treatment. [ASU 2017-11](https://storage.fasb.org/ASU%202017-11.pdf) changed that: a down round feature no longer precludes equity classification on the indexation question, and a freestanding equity-classified instrument records the effect as a dividend when the feature is triggered. For entities other than public business entities it applied to fiscal years beginning after December 15, 2019.

Warrants attached to venture debt differ in detail from standalone warrants, so the memo reads each one.

## How do you record conversion in a priced round?

The entries differ by instrument and by how it was classified. In plain terms:

- **Convertible note converting on its terms.** Remove the note, accrued interest and unamortized discount or issuance cost. Credit preferred stock and additional paid-in capital for the same total. No gain or loss (ASC 470-20-40-4).
- **SAFE carried as a liability.** Remeasure to fair value just before conversion and book the change in earnings. Then reclassify the carrying amount to preferred stock and additional paid-in capital as the shares are issued.
- **SAFE classified in equity.** Reclassify within equity from the SAFE line to preferred stock.
- **Warrant exercised for shares.** Add the cash received and the warrant's carrying amount to equity.

The schedule that supports the entries lists each instrument, its balance, the conversion price math and the shares issued. It ties to the cap table before and after the round. Finbryn builds the schedule and the entries from the executed documents and the closing statement. The share price used in a fair value remeasurement comes from management or its valuation specialist; the model side is covered by [derivative valuation for financial reporting](/services/credit-loss-derivatives-fair-value/derivative-valuation-financial-reporting).

If the same round granted options, the expense schedule is on the [stock compensation page](/services/technical-accounting-advisory/stock-compensation-asc-718-ifrs-2). For investor-facing numbers after the round, see [investor reporting](/services/virtual-cfo-advisory/investor-reporting).

## What does the memo contain, and what do you need to send?

A convertible instrument memo has six parts: the facts with clause references, the accounting question, the guidance considered (ASC 480, ASC 470-20, ASC 815-40 and, for a subsidiary of a foreign parent, IAS 32 and IFRS 9), the analysis of each term, the conclusion and the journal entries. Alternatives that were considered and set aside go in as well. An auditor reads that section first.

Send the executed SAFEs, notes or warrants, any side letters, the cap table before and after each round, the closing statement of the priced round and any valuation report on the underlying shares. Include board minutes if conversion terms were amended.

You get back the memo, the roll-forward by instrument, the conversion entries and draft disclosures. ASU 2020-06 requires, for each convertible debt instrument, the unamortized discount, premium or issuance costs and the net carrying amount, plus information about events or conditions during the period that cause conversion contingencies to be met or conversion terms to change significantly (ASC 470-20-50). The instrument-level fair value disclosure applies to public business entities only. The draft footnote follows those lists.

Under IFRS the same questions are answered by IAS 32 for classification and IFRS 9 for embedded derivatives, with different tests. A subsidiary reporting to an IFRS parent needs both outcomes in the bridge, which the [IFRS reporting pack](/services/month-end-close-reporting/ifrs-reporting-packs-us-subsidiaries) carries.

## The process

1. **Inventory every instrument**: SAFEs, notes, warrants and side letters, with issue dates, amounts, cap and discount terms and settlement clauses.

2. **Extract the clauses that drive classification**: Conversion mechanics, cash payout rights, redemption and anti-dilution, shown in a term sheet with page references.

3. **Write the classification memo**: One memo per instrument type: ASC 480, ASC 470-20 and ASC 815-40 applied to the terms, with the conclusion.

4. **Build the roll-forward**: Balance by instrument, with fair value inputs supplied by management or its specialist where the liability is remeasured.

5. **Draft entries and disclosures**: Conversion entries tied to the cap table, and footnote text for your controller to edit.

## Common problems we fix

| The problem | How we fix it |
| --- | --- |
| SAFEs sit in equity because that is how the cap table shows them | Each SAFE is read against ASC 480-10-25-14 and the ASC 815-40 settlement conditions, and the classification is argued from its terms, not its label. |
| A priced round converted five instruments and nobody can tie the new shares to the old balances | The conversion schedule ties each instrument's carrying amount to the shares issued and to the closing cap table. |
| Warrants were booked at the exercise price and never revisited | We test indexation and the settlement conditions, then set up fair value remeasurement if the warrant is a liability. |
| The auditor's draft adjustment moves the SAFE to a liability late in the audit | A memo written before the audit sets out the terms and the test, so the discussion starts from analysis rather than a surprise entry. |

## By the numbers

| Figure | What it means | Source |
| --- | --- | --- |
| Fiscal years beginning after December 15, 2023 | ASU 2020-06 effective date for private companies, with the beneficial conversion model removed | [storage.fasb.org/ASU%202020-06.pdf](https://storage.fasb.org/ASU%202020-06.pdf) (2020-08-01) |
| No interest, no maturity | Y Combinator's description of its standard SAFE, which is why classification turns on conversion and payout terms | [ycombinator.com/documents](https://www.ycombinator.com/documents) (2026-10-16) |

## Glossary

- **SAFE**: A simple agreement for future equity, a contract that gives an investor shares of a company's stock later, usually when it sells shares in a priced round.

- **Valuation cap**: The highest valuation at which a SAFE converts, which sets the conversion price when the next round values the company above it.

- **Bifurcation**: Separating an embedded feature, such as a conversion option, from its host contract and accounting for it as a derivative.

- **Indexed to own stock**: The first ASC 815-40 test, asking whether the contract's payoff depends only on the company's own share price and standard inputs.

- **Down round feature**: A term that lowers a conversion or strike price if the company later sells shares at a lower price.

- **Induced conversion**: A change in conversion terms offered to get holders to convert, accounted for differently from a conversion on the original terms.

## Frequently asked questions: Accounting for convertible notes, SAFEs and warrants

**Q: How do I account for a SAFE note on the balance sheet?**

A: Read the signed terms against ASC 480 and ASC 815-40, then record it as a liability at fair value or in equity. Conversion into a variable number of shares and a cash payout on a liquidity event point toward a liability. YC's SAFE FAQ (checked 2026-10-16) says the standard SAFE has no interest or maturity date.

**Q: Do SAFEs count as liabilities under US GAAP?**

A: Sometimes. It turns on the terms, and no FASB Update or Codification paragraph names the SAFE (checked 2026-10-16). An obligation settled in a variable number of shares worth a predominantly fixed amount is a liability under ASC 480-10-25-14, from FASB Statement 150 (May 2003). The memo shows the terms, the test and the conclusion.

**Q: How do I record a convertible note converting in a priced round?**

A: When it converts on its original terms, credit the capital accounts for the note's carrying amount, net of unamortized costs, and recognize no gain or loss (ASC 470-20-40-4, as amended by ASU 2020-06). A change that induces conversion is a separate analysis under ASU 2024-04, effective for annual periods beginning after December 15, 2025.

**Q: Does ASU 2020-06 apply to my startup?**

A: If you are not an SEC filer, it applies to fiscal years beginning after December 15, 2023, so calendar-year 2024 onward. It removed the beneficial conversion feature and cash conversion models, so most convertible notes are now a single liability at amortized cost unless a feature must be separated as a derivative.

**Q: Can a warrant with a down round feature be equity?**

A: Yes, on the indexation question. ASU 2017-11 provides that a down round feature no longer precludes equity classification. The warrant still has to pass the ASC 815-40 settlement conditions, and a freestanding equity-classified warrant records the effect of a triggered down round as a dividend in basic EPS.

**Q: Do you value the conversion feature or the warrants?**

A: Not inside this engagement. The memo, roll-forward and entries use fair values from management, its valuation specialist or a separate Finbryn engagement under [derivative valuation for financial reporting](/services/credit-loss-derivatives-fair-value/derivative-valuation-financial-reporting), which values warrants and bifurcated features for reporting only. Finbryn issues no valuation opinion, 409A valuation or fairness opinion. Scope checked 2026-10-16.

Related services:
- [Stock compensation accounting under ASC 718 and IFRS 2](https://finbryn.com/us/services/technical-accounting-advisory/stock-compensation-asc-718-ifrs-2)
- [Accounting position papers and technical memos](https://finbryn.com/us/services/technical-accounting-advisory/technical-accounting-memos-position-papers)
- [Fundraising financial models](https://finbryn.com/us/services/virtual-cfo-advisory/fundraising-financial-models)
- [Investor reporting](https://finbryn.com/us/services/virtual-cfo-advisory/investor-reporting)
- [IFRS reporting packs for US subsidiaries of foreign parents](https://finbryn.com/us/services/month-end-close-reporting/ifrs-reporting-packs-us-subsidiaries)

Industries:
- [Startups and VC-backed companies](https://finbryn.com/us/industries/startups-vc-backed)
- [Fintech and payments companies](https://finbryn.com/us/industries/fintech-payments)
- [SaaS](https://finbryn.com/us/industries/saas)

Related guides:
- [The Startup Accounting Guide: Formation to First Audit](https://finbryn.com/us/guides/startup-accounting-guide)
- [The Fundraising Finance Data Room: What Investors Expect](https://finbryn.com/us/guides/fundraising-finance-data-room)
- [New US GAAP Standards Effective 2026 to 2028](https://finbryn.com/us/guides/new-us-gaap-standards-effective-2026-2028)

## Sources

1. [FASB, ASU 2020-06: Accounting for Convertible Instruments and Contracts in an Entity's Own Equity (text of ASC 815-40-25-7 to 25-10 and 470-20-40-4)](https://storage.fasb.org/ASU%202020-06.pdf) (2026-10-16)
2. [FASB, ASU 2017-11: Accounting for Certain Financial Instruments with Down Round Features](https://storage.fasb.org/ASU%202017-11.pdf) (2026-10-16)
3. [FASB, ASU 2024-04: Induced Conversions of Convertible Debt Instruments](https://storage.fasb.org/ASU%202024-04.pdf) (2026-10-16)
4. [FASB, Statement 150: Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (source of ASC 480-10-25-14)](https://storage.fasb.org/aop_fas150.pdf) (2026-10-16)
5. [Y Combinator, SAFE documents and FAQ](https://www.ycombinator.com/documents) (2026-10-16)
6. [FASB Accounting Standards Codification, Topic 815-40 Contracts in Entity's Own Equity](https://asc.fasb.org/815/tableOfContent) (2026-10-16)
7. [FASB Accounting Standards Codification, Topic 480 Distinguishing Liabilities from Equity](https://asc.fasb.org/480/tableOfContent) (2026-10-16)

Reviewed October 2026

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