![]() Now let’s suppose a company raised its seed round by issuing a convertible note that had no valuation cap but did have a 20% discount to the Series A round.Note that an investor investing that same $10,000 directly in the Series A round at $10 per share would only be issued 1,000 shares. Dividing a hypothetical $10,000 investment by that $3.33 per share price would grant the seed investor approximately 3,000 shares. In this example that works out to $3.33 per Series A share for convertible note holders. In order to calculate the valuation cap adjusted price per share for convertible note holders, you would divide the valuation cap on the note by the pre-money valuation of the subsequent round and apply that to the Series A price per share. In our first example, we’ll imagine that a company raised its seed round by issuing a convertible note with a $4M valuation cap and no discount before raising its Series A round at a $12M pre-money valuation and a $10 price per share.For simplicity’s sake, we will ignore accrued interest in our calculations. We’ll start by singling out the two most important variables associated with a convertible note – the valuation cap and discount rate – and then will see how these two interact. Let’s walk through a few examples of what this conversion into equity actually looks like. This denotes the date on which the note is due, at which time the company needs to repay it. However, as opposed to being paid back in cash, this interest accrues to the principal invested, increasing the number of shares issued upon conversion. Since you are lending money to a company, convertible notes will more often than not accrue interest as well. It effectively caps the price at which your notes will convert into equity and – in a way – provides convertible note holders with equity-like upside if the company takes off out of the gate. The valuation cap is an additional reward for bearing risk earlier on. This represents the valuation discount you receive relative to investors in the subsequent financing round, which compensates you for the additional risk you bore by investing earlier. When evaluating a convertible note, there are a few key parameters that must be kept in mind: Discount Rate That valuation will usually be determined during the Series A financing, when there are more data points off which to base a valuation. The primary advantage of issuing convertible notes is that it does not force the issuer and investors to determine the value of the company when there really might not be much to base a valuation on – in some cases the company may just be an idea. No individuals were compensated in exchange for their testimonials.Ī convertible note is a form of short-term debt that converts into equity, typically in conjunction with a future financing round in effect, the investor would be loaning money to a startup and instead of a return in the form of principal plus interest, the investor would receive equity in the company. Testimonials may not be representative of the experience of others and are no guarantee of future performance or success.In order to achieve diversification, we do not recommend you allocate more than 10% of your entire investment portfolio to alternative assets. In addition, enrolling in this program will not lead to diversification across your entire investment portfolio. There is no guarantee that this program will lead to a well-balanced portfolio of companies across industry types or stages across the asset class. ![]() Diversification is only across multiple early-stage investment opportunities within the asset class.Learn more about due diligence on the SeedInvest Blog ( ) and our vetting process in our FAQs ( ). SeedInvest’s selection criteria does not suggest higher quality investment opportunities nor does it imply that investors will generate positive returns in investment opportunities on SeedInvest.All investors should carefully review each investment opportunity and cancel their subscription within the allotted time-frame if they do not feel comfortable making any specific investment based on their own DD. SeedInvest’s due diligence process is no guarantee of success or future results.
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