Let’s walk through a few examples of what this conversion into equity actually looks like. 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. For simplicity’s sake, we will ignore accrued interest in our calculations.

- 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. 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 this example that works out to $3.33 per Series A share for convertible note holders. Dividing a hypothetical $10,000 investment by that $3.33 per share price would grant the seed investor approximately 3,000 shares. 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. - 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. In this exercise, the pre-money valuation at which the Series A round was raised is not important, only the price per share. Again, let’s assume that it is $10. Applying the 20% discount to that price per share would yield a discounted price per share for the convertible note holder of $8. If an investor were to have invested $10,000 in the convertible note, they would therefore receive 1,250 Series A shares. Again, note that that same $10,000 invested by a Series A investor would only purchase 1,000 Series A shares.