Startup Funding Espresso -- How to Handle Convertible Notes in a Cap Table
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.\xa0\xa0 Upon maturity, the debt typically converts to equity. The conversion is based on the principal amount, accrued interest, and the discount offered.\xa0 To calculate the impact on your cap table, you\u2019ll also need to know the number of shares issued and outstanding.\xa0 The valuation cap sets the maximum value of the company upon conversion. Let\u2019s 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\u2019s say the company has 1M shares outstanding and the valuation of the company is $5M at the next round of funding.\xa0 Non-convertible noteholders would get $5M divided by 1M shares, or a price of $5 per share.\xa0 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.\xa0 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. \xa0 Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.Let\u2019s go startup something today. ___________________________________ For more episodes from Investor Connect, please visit the site at: \xa0 Check out our other podcasts here: \xa0 For Investors check out: \xa0 For Startups check out: \xa0 For eGuides check out: \xa0 For upcoming Events, check out \xa0 For Feedback please contact info@tencapital.group\xa0\xa0 Music courtesy of