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But First — What is a Convertible Note Again?

Before we explain a convertible note calculator and why it’s useful, a quick recap on convertible notes. 

Convertible notes are a form of debt that a company issues to raise funds.

The holder of a convertible note will loan money to the company and can convert that loan into equity when a specified event (for example, a funding round) occurs. If that specified event doesn’t occur, the company may need to repay the loan amount at the date of the convertible note.

What Does the Convertible Note Calculator Do?

A convertible note calculator is a spreadsheet that calculates the ‘value’ of a convertible note upon conversion into equity under different scenarios.

The value is often expressed as the percentage of shares that the convertible note holder will hold in the company once the convertible note converts into equity.

The calculator is useful for convertible note holders, founders and existing shareholders, and for potential investors looking to invest in a company that has issued convertible notes. This is because the calculator shows who would hold what percentage of the company if all the convertible notes converted into shares (also known as the ‘fully diluted’ capital of the company).  

Why Do You Need a Convertible Note Calculator?

The ‘value’ of a convertible note on conversion will depend on any discount or cap. As a result, it will not be immediately obvious what the ‘value’ of a convertible note is on conversion without doing some math. The convertible note calculator does that math for you. 

How Does a Convertible Note Calculator Work?

You can access a convertible note calculator online. Most calculators will ask you to enter the following details: 

  • face value of the convertible note;
  • any interest rate (and issue date);
  • discount; and
  • valuation cap.

You then enter the pre-money valuation of the company and the investment amount if the company is undertaking additional investment from other parties.

The calculator will show you what percentage share in the company the convertible note holder will receive upon conversion. It will show you how the convertible note investment, and the investment by any new investors, change the percentage ownership of the existing shareholders. It will also show you the post-money valuation of the company.

Since the percentages will depend on the interplay between the pre-money valuation, the investment and the cap on the convertible note, some calculators will produce graphs for you showing how the percentages change as the inputs change. Others have ‘sliders’ that allow you to move the figures around and see the output change as you do it. 

Importantly, it’s the underlying inputs and calculations that matter — otherwise any output will be incorrect and could result in founders making poorly informed decisions. Ensure you understand the features of your convertible note and that they are modelled correctly in the calculator.

How Does a Convertible Note Calculator Fit in With a Cap Table?

Any cap table in which you can model an investment round with existing convertible notes will need to have a built-in ‘convertible note calculator’. In short, a convertible note calculator is part of the functionality a cap table requires.  

If you are a convertible note holder and simply want to know the value under different scenarios, you just need a convertible note calculator. But the company, founders and other investors need the whole cap table to see the big picture.

A word of caution: a ‘cap table’ and convertible note cap are two wildly different concepts. Don’t confuse the two!

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Download your free cap table to manage your startup’s equity. The proforma template will allow you to model shares, options and convertible notes. You can also discuss your upcoming capital raise with our startup lawyers on 1300 544 755.

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