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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.

1. 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.
2. 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... (More)

A 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.

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. That valuation will usually be determined during the Series A financing, when there are more data points off which to base a valuation.

Convertible Note Terms

When evaluating a convertible note, there are a few key parameters that must be kept in mind:

Discount Rate

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.

Valuation Cap

The valuation cap is an additional reward for bearing risk earlier on. 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.

Interest rate

Since you are lending money to a company, convertible notes will more often than not accrue interest as well. However, as opposed to being paid back in cash,... (More)

Let me first explain why i am motivated to tell this....

In the entrepreneurship summit of my college (NIT Silchar) called SRIJAN 1.0, a pitching competition was organised, my team cleared the screening but couldn't win anything. One of the reason of this was the fact that I was asked this term by the investor and I, although already knowing the calculated value, couldn't answer because of the unknown term and how heavy it sounded......

CAC or Customer Accusation Cost is the cost of convincing a potential customer to buy a product or service. It is a metric that has been growing in use, along with the emergence of Internet companies and web-based advertising campaigns that can be tracked.

This metric is important to two entities: companies and investors. The first one includes outside, early-stage investors who use it to analyze the scalability of new Internet technology companies. They can determine a company’s profitability by looking at the difference between how much money can be acquired from customers and the costs of getting it. Investors also view this the same way, they generally value the current metrics instead of promises of improving the future.

The CAC can be calculated by simply dividing all the costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent.

Accelerator (aka Incubator) => A center where start-ups are “incubated” through mentor-ship, and sometimes cash. They may also provide space.

Accredited Investor => According to the SEC: “A natural person with income exceeding $200,000 in each of the two most recent years or joint income with spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person.”

Advertorials / Advertainment => Paid content that is meant to look and feel like a real story or blog post. More people are interested than you think, people actually enjoy the advertainments and thus are not bothered by the fact that they are being pitched.

Burn Rate (aka Run Rate) => How fast you are blowing through your cash. It’s not unusual for a start-up to lose large sums of money for several years before breaking even, or making a profit.

Exit Strategy => How you will sell the company and make your investors money. Basically Who is going to buy you and why?

FMA or First Mover Advantage => Not every start-up is the first to market, but if you are, you want to point that out to investors. Remember that this is both a pro and con as although you have no competition, you may have... (More)