A convertible note is a type of debt instrument that allows the lender to convert their investment into equity in the future, usually at a later funding round. The conversion of the debt into equity is typically triggered by a qualifying event, such as the company reaching a certain valuation or reaching a specified date.
Convertible notes can be extremely valuable because they allow the company to raise capital quickly, deferring the valuation decision until a later stage. This can reduce the uncertainty and risk associated with early-stage investing, making it a more attractive option for both parties. This calculator lets you assess the impact of issuing a convertible note with a given discount and valuation cap, carrying an annual compound interest, in correspondence with a new investment round that triggers the conversion.
The components required to compute the impact of a Convertible Note are:
The amount of money raised through the Note
The discount, namely a percentage reduction in the price per share relative to the next funding round.
The valuation cap, namely the maximum valuation at which the convertible note will convert into equity.
The annual interest rate, if applicable, to be paid on the outstanding principal of the note. Typically expressed as an annual percentage rate.
The date of the next funding round
The valuation of the next funding round
This calculator's output includes:
The number of new shares issued to the Noteholders
The number of new shares issued to the New Investors
Total current shareholders' dilution