Investor Connect Podcast

Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.

A fully-diluted cap table shows the impact of the conversion of convertible notes.

A convertible note has a date of issue, an interest rate, a discount rate, a valuation cap, and a maturity date.  

Upon maturity, the debt typically converts to equity.

The conversion is based on the principal amount, accrued interest, and the discount offered. 

To calculate the impact on your cap table, you’ll also need to know the number of shares issued and outstanding. 

The valuation cap sets the maximum value of the company upon conversion.

Let’s say we have a $1M convertible note, with a 10% discount, a 5% interest rate, a $3M valuation cap, and a maturity date of 3 years.

Let’s say the company has 1M shares outstanding and the valuation of the company is $5M at the next round of funding. 

Non-convertible noteholders would get $5M divided by 1M shares, or a price of $5 per share. 

The convertible noteholders will get the valuation cap divided by the number of outstanding shares, or $3M/1M or $3 per share price.

The convertible noteholders will get their shares at a lower price because of the valuation cap. 

The convertible note investors investing $1M divided by $3 per share, equals 333,333 shares.

The interest rate and discount rate would further reduce the price the investors pay for their shares.

These shares are added to the cap table which dilutes the value of the shares of the existing investors.


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Direct download: How_to_Handle_Convertible_Notes_in_a_Cap_Table.mp3
Category:general -- posted at: 6:00am CDT