Convertible Note Conversion Price

The price per share at which the principal and accrued interest on the Convertible Notes convert into shares of Preferred Stock in the next round of financing. This price is lower than the price paid by new equity investors in the next round of financing, so that the Convertible Note Investors get some benefit of getting their money in and supporting the Company at an earlier date.

At conversion, Investors receive equity either based on a discount rate or on a valuation cap. The calculation of the number of shares the Investors receive is the principal and interest under each Convertible Note divided by (1) the price of the next round equity multiplied by the Discount Rate, (2) the Valuation Cap divided by the Company’s capital stock at the time of conversion or (3) the lesser of the two.

Discount Rate: This is a straight percentage discount on the preferred equity price in the Next Equity Financing.

Typically range between 10% to 30% off of the preferred equity price, with the most common discount being 20%.

Valuation Cap: A price ceiling set by the current value of the shares excluding capital the Company will receive in the pending convertible-note financing (pre-money valuation).

Valuation caps range between $3 to 5 million on the lower end and $8 to 10 million on the higher end for a seed-stage Convertible Note financing