Serve Robotics Inc. /DE/SERV
Serve Robotics Inc. /DE/ Fair Value Disclosure
FAIR VALUE MEASUREMENTS
The Company’s financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used for such measurements were as follows:
There were no Level 1, 2 or 3 assets or liabilities as of December 31, 2024 or 2023.
Simple Agreements for Future Equity
The Company measures the simple agreements for future equity (“SAFE” or “SAFEs”) at fair value based on significant inputs not observable in the market, which causes it to be classified as a Level 3 measurement within the fair value hierarchy. The valuation of the future equity obligations uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained. Changes in the fair value of the simple agreements for future equity related to updated assumptions and estimates are recognized within the statements of operations.
The simple agreements for future equity may change significantly as additional data is obtained, impacting the Company’s assumptions regarding probabilities of outcomes used to estimate the fair value of the liability. In evaluating this information, considerable judgment is required to interpret the data used to develop the assumptions and estimates. The estimates of fair value may not be indicative of the amounts that could be realized in a current market exchange. Accordingly, the use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts, and such changes could materially impact the Company’s results of operations in future periods.
The Company utilized a probability-weighted average approach based on the estimated market value of the underlying securities and the potential settlement outcomes of the simple agreements for future equity, including a liquidity event or future equity financing as well as other settlement alternatives. Both the market value of the underlying securities and the probability of settlement outcomes include unobservable Level 3 inputs.
As of December 31, 2022, the Company assumed a 85% probability of a liquidity and/or equity financing events as the primary ultimate settlement outcomes of the future equity obligations. Immediately prior to the Merger, the Company revalued the remaining outstanding SAFEs using a 100% probability of an equity financing and $4.00 as the fair value of
the underlying common stock (see Note 6). Upon the Merger, the SAFEs converted into 4,372,601 shares of common stock at a fair value of $17,490,404.
Derivative Liability
In connection with the Company’s convertible notes, the Company recorded a derivative liability (see Note 5). The estimated fair value of the derivative liability is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.
The fair value of the derivative liability is valued using a with-or-without analysis utilizing the terms of the notes and assumptions regarding cash settlement or conversion to equity.
The following table sets forth a summary of changes in the fair value of our Level 3 financial instrument liabilities for the years ended December 31, 2024 and 2023:
| Simple Agreement For Future Equity | Embedded Derivative Liability | Total | |||||||||||||||
| Outstanding as of December 31, 2022 | $ | 13,150,745 | $ | - | $ | 13,150,745 | |||||||||||
| Issuance of simple agreements for future equity | 2,666,953 | - | 2,666,953 | ||||||||||||||
| Issuance of embedded derivative liability | - | 601,000 | 601,000 | ||||||||||||||
| 1,672,706 | 149,000 | 1,821,706 | |||||||||||||||
| Conversion to common stock upon Merger | (17,490,404) | (750,000) | (18,240,404) | ||||||||||||||
| Outstanding as of December 31, 2023 | - | - | - | ||||||||||||||
| Issuance of embedded derivative liability | - | 1,489,000 | 1,489,000 | ||||||||||||||
| - | 221,560 | 221,560 | |||||||||||||||
| Conversion to common stock upon Merger | - | (1,710,560) | (1,710,560) | ||||||||||||||
| Outstanding as of December 31, 2024 | $ | - | $ | - | $ | - | |||||||||||
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.