What is Qualified Financing?
Qualified financing is a threshold (typically $1M-$2M) that when crossed, triggers automatic conversion of convertible securities. It ensures conversions happen in meaningful funding events, not tiny bridge rounds.
Setting the Threshold
The threshold should be high enough to indicate a real round but low enough that you can realistically raise it. Too high and you might need to negotiate conversions; too low and small raises trigger unwanted dilution.
Below-Threshold Raises
If you raise less than qualified financing, convertible holders don't automatically convert. This can create messy cap tables with multiple unconverted instruments. Negotiate conversion terms if this happens.
Formula
Typical qualified financing thresholds:
- Seed SAFEs: $500K-$1M
- Convertible notes: $1M-$2M
- Later notes: May specify Series A specifically
Example
SAFE terms: $200K, converts on qualified financing of $1M+.
Scenario 1: Raise $1.5M Series A. Qualified financing met. SAFE converts.
Scenario 2: Raise $600K bridge. Below threshold. SAFE remains unconverted, still outstanding.
Scenario 3: Raise $300K then $800K. Neither is qualified. SAFEs still outstanding until a $1M+ round.