Convertible Note

Valuation cap – the maximum valuation as agreed when the investment was first made



Example 1: a VC invests $2.5M on a pre-money valuation of $5M

  • First, we work out which valuation to use. The lower of:
    1. the pre-money valuation: $5M
    2. the Conversion Cap: $4M
    3. the Conversion Discount applied to the Pre-Money Valuation: 15% off of $5M = $4.25M
  • So we use the Conversion Cap valuation of $4M to convert
  • The Investors in the Convertible Debt round get 100,000 * ($500k / $4M) = 12,500 shares

If no valuation cap and discount with 8M valuation, they only get half of the shares compared to with 4M valuation cap. (6250 shares)

convertible note, investment, startup, finance,


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