CapTable Calculations (II): Note fundraising

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Key Takeaways

  • When performing note conversions, we need to determine whether to do so using the valuation cap-based or discount rate-based approach
  • The valuation cap and discount-rate approaches for post-money and pre-money conversions are NOT the same
  • Updating the CapTable with notes will also involve the "work backwards" approach, as discussed in our earlier articles
  • Pre-money conversions create more ambiguity, and the process of checking the optimality of the calculations is inefficient

DISCLAIMER: The information and methods presented in this article are not hard-and-fast rules for CapTable calculations. These are suggestions based on the Svested team’s decades of experience assisting hundreds of companies with their CapTable calculations.  In addition, the scenarios presented here are solely for the purpose of illustrating our calculation methods, and may not exactly reflect real-life CapTable situations.


In our previous article, we demonstrated how to update a CapTable for priced equity rounds, including changes to a company’s ESOP pool.  Today’s article – the 6th in our new CapTable series – we continue our discussion by showcasing how a CapTable is updated when converting notes into equity, which requires more attention due to the increased complexity of these calculations.

Post-money conversions (SAFEs)

We start off with Company Y, which has just completed its Seed round with 2 founders and 2 Seed investors (Investors C and D).  Its post-Seed CapTable is shown below:

  • It has 2 founders, who collectively invested $1,500 and hold 1,500,000 shares
  • It also has 2 Seed investors (Investors C and D), who respectively invested $120,000 and $80,000.  
  • At the same time, the Seed investors had requested that Company X to set aside a 10% ESOP pool.

For its Series A round, things are a little more complicated.  The details are as follows:

  • Company Y’s pre-money valuation is $4,000,000
  • Company Y has confirmed $800,000 in investment from 1 Series A investor (Investor E), making its post-money valuation $4,800,000
  • Investor E has requested an expansion of the ESOP pool to 12% 
  • At the same time, the company has 2 SAFEs due for conversion into equity, and their details are shown in the table below

The post-completion CapTable for Company Y will look like the following:

Let’s see how the above values are derived.

Step 1: Calculate shareholdings for priced round investor

To begin, we calculate the new percentage shareholdings for the priced round investor (Investor E), as well as the noteholders.  The percentage shareholding for Investor E is easily calculated – dividing his $800,000 invested amount by Company Y’s post-money valuation of $4,800,000, we get a 16.67% shareholding.

Step 2: Determine the appropriate conversion calculation method for noteholders

As for the noteholders, as discussed in our 3rd CapTable series article, a decision must be made as to whether to use the Valuation Cap calculation method, or the Discount rate calculation method.  The chosen method will be the one which grants the relevant noteholder a lower price per share, or a greater number of shares.

Starting with SAFE-1, which has a post-money valuation cap of $4,000,000, we notice that the company’s post-money valuation for the round ($4,800,000) already exceeds the valuation cap.  The discount which SAFE-1’s noteholder will receive using the valuation cap, is: 1 – (4,000,000 / 4,800,000) = 16.67%, which is greater than the discount rate of 15%.  As such, for SAFE-1, the valuation cap method is used.

As for SAFE-2, the reference valuation cap after taking into account the discount rate is $6,250,000 (= $5,000,000 / [1 – 20%]) = $6,250,000.  This is greater than Company Y’s post-money valuation of $4,800,000.  Using the valuation cap method would, in effect, create a “negative discount for SAFE-2’s noteholder.  As such, for SAFE-2, the discount rate is used instead.

Step 3: Valuation cap-based conversion calculations (SAFE-1)

For SAFE-1, which is converted based on its valuation cap, simply take the invested amount ($250,000), and divide that by the valuation cap ($4,000,0000), and we arrive at a 6.25% shareholding for SAFE-1’s noteholder.  Do note that in this case, the calculation is simplified, because there is no accrued interest.  

Special: What if there is accrued interest… 

If, hypothetically, we were to add, say, a 10% interest to SAFE-1, which has just fully accrued, then SAFE-1’s percentage shareholdings would instead be: [$250,000 ⨉ (1 + 10%)] / $4,000,000 = 6.88%.  The multiplication of $250,000 by 1.1 represents an addition of the accrued interest into the originally invested amount.

As can be seen, any interest on notes will be like a “double discount”, granting the noteholder an even greater shareholding (on top of the bonus they get from either the valuation cap or discount rate).  

Step 4: Discount rate-based conversion calculations (SAFE-2)

Step 4A: Factor in the discount rate to find "discount-adjusted investment conversion"

To put this into words, firstly, we factor in the discount rate by dividing the total investment amount – $250,000 – by (1 – 20%), to obtain $312,500.  The discount rate, like the valuation cap, is an added benefit for noteholders for having invested early with Company Y.  In this case, while SAFE-2’s noteholder only invested $250,000, with the discount rate, he effectively will receive an “inflated” $312,500 worth of shares.

Step 4B: Calculate percentage shareholding using discount-adjusted investment conversion

Second, we take $312,500 and divide it by the company’s post-money valuation for Series A – that is, $4,800,000 – to finally arrive at our answer of 6.51%.

To summarise, full formula for calculating the shareholdings of SAFE-2’s noteholder will be: [250,000 / (1 – 20%)] / 4,800,000 = 6.51%

Special: What if there is accrued interest… 

To factor in accrued interest into discount rate-based calculations, similar to the valuation cap conversion approach, simply add the accrued interest to the originally invested amount, before performing the division (in Step 4A).

Step 5: Perform the usual steps of the “work backwards” method

Now that we have calculated the shareholdings of Investor E, as well as SAFE-1 and SAFE-2’s noteholders, we go back to the “work backwards” method discussed in last week’s article.  

First, add up the total percentage shareholdings for the 3 incoming stakeholders, plus the updated ESOP pool – that will give a 41.43% shareholding, or in other words, the total shares held by the founders, Investor C and Investor D, will now make up only 58.57% of all shares.

The new total number of shares, at the conclusion of the Series A round, will be 3,142,936 (= 1,840,909 / 0.5857).  Once this has been derived, the calculation for the number of shares, and price per shares will come easily.

Pre-money conversions (Traditional CNs)

The most difficult calculations are those performed on a pre-money basis, so do follow this section closely.  Let us consider Company Z, which has the exact same numbers as Company Y after their Seed round, as follows:

For Company Z’s Series A round, the details are as follows:

  • Company Z’s pre-money valuation is $4,000,000
  • Similar to Company Y, Company Z has confirmed $800,000 in investment from 1 Series A investor (Investor E), making its post-money valuation $4,800,000
  • Investor E has requested an expansion of the ESOP pool to 12% 

At the same time, the company has 2 CNs due for conversion into equity, and their details are shown in the table below:

Let's now work out the new CapTable step by step.

Step 1: Calculate shareholdings for priced round investor

Doing exactly the same thing we did for the post-money case above, Investor E’s final percentage shareholdings will be the same, at 16.66667%.  

Step 2: Determine the appropriate conversion calculation method for noteholders

As usual, we start by checking the valuation caps, taking into account the discount rate.  For CN-1, the derived valuation cap is $3,750,000 (= $3,000,000 / 0.8), while for CN-2, the derived valuation cap is $4,705,882 (= $4,000,000 / 0.85).  Noting that these valuation caps are pre-money, we realise that for CN-1, the company’s pre-money valuation of $4,000,000 already exceeds its cap, while this is not the case for CN-2.  Thus, the suitable calculation methods appear to be, respectively, valuation cap for CN-1, and discount rate for CN-2.

Step 3: Valuation cap-based calculations (CN-1)

For pre-money calculations, valuation cap calculations happen first, before discount rate-based and post-money calculations.  This also means that CN-1’s noteholder will be diluted once before they know their final percentage shareholding.

This is unlike the post-money conversion example above, where the type of conversion done first (valuation cap-based or discount rate-based) does not matter.  

Step 3A: Calculate the invested amount, factoring in interest accrued

First, we calculate the effective invested amount.  In this case, given the 10% interest rate, assuming that 1 year of interest has just fully accrued, the holder of CN-1 would have $330,000 (= $300,000 ⨉ 1.1) to be converted into equity.  Should there not be any interest accrued, this step can be omitted.  

Step 3B: Calculate noteholder’s price per share

This step distinguishes the pre-money valuation cap-based conversion approach from the post-money valuation cap-based conversion approach

For the pre-money case, the noteholder’s price per share can be directly calculated.  It is derived by taking the note’s valuation cap, and dividing it by the total number of pre-money shares (including the ESOP pool).

In this case, for CN-1, the calculated price per share is $1.467 (= $3,000,000 / 2,045,455), with the divisor being the total number of shares Company Z had after its Seed round, including its ESOP pool.  

Step 3C: Find the number of shares for noteholder

Lastly, the number of shares distributed would simply be the total invested amount, divided by the price per share.  In this case, the holder of CN-1 receives 225,000 shares (= $330,000 / $1.467).

Step 4: Discount rate-based calculations

Once this is done, we switch to the discount method for CN-2’s calculations.  For pre-money discount-based calculations, the approach is similar to the discount-based calculations for post-money cases.  

Step 4A: Factor in accrued interest

We first take into account the accrued interest, which we again assume has just fully accrued after 1 year.  We take the interest earned and add it to the original investment, to get $275,000.  

Step 4B: Factor in discount rate

Following that, we factor in the discount rate, dividing $275,000 by (1 – 15%), getting $323529.4118.  Once this is done, we divide this value by the company’s post-money valuation, to finally arrive at 6.74%.  Notice that here we use the post-money valuation for division, rather than the pre-money valuation.

To summarise, the percentage shareholdings for CN-2’s noteholder will be given by: [($250,000 ⨉ 1.1) / 0.85] / $4,800,000 = 6.74%.

Step 5: Perform the usual steps of the “work backwards” method

From this step, we return to the “work backwards” approach, which you would already be familiar with.  We tally up the total percentage shareholdings which go to CN-2’s noteholder, Investor C, and the ESOP pool – that gives us 35.419%, which also means that all existing shareholders (including CN-1’s noteholder) hold 64.59% of all shares.  

In this case here, the total number of shares after Series A is calculated to be 3,198,341 (= 2,065,909 / 0.6459), where 2,065,909 is the sum of shares held by the 4 stakeholders from the Seed round, and the shares converted for CN-1’s noteholder.

To save some time on the calculations, the final CapTable will be as shown below.  Do note that similar to CN-1, the total investment for CN-2 also factors in 10% interest – that is, $250,000 ⨉ 1.1 = $275,000.

The ambiguity of pre-money calculations

As we are about to show, the correct calculation method for pre-money calculations may not be immediately clear.

Based on what we discussed above, using what we expect to be the correct methods for converting CN-1 and CN-2, we derive the following CapTable:

But looking at this post-completion CapTable, you should instinctively realise that something does not make sense – the price per share for CN-1’s noteholder.  The price per share does not make sense, because (a) CN-1’s discount to Investor E’s price per share is only about 3%, and (b) even though CN-1 is supposed to enjoy a heavier discount than CN-2, the price per share for CN-1 is still higher than that given to CN-2.  This constitutes a violation of the share agreement.

Now, let us instead use the discount rate-based method for both CN-1 and CN-2 – a different approach from what we expect to be correct.  To avoid too much repetition, we have provided the final CapTable for this approach, as shown below.  If you have understood the principles and calculation approaches discussed above, you should be able to derive these values as well.

In this case, the numbers now make much better sense.  CN-1, with a higher discount rate, has a conversion price per share which is lower than CN-2.  In addition, just try to take the respective price per share for CN-1 and CN-2, and divide it by Investor C’s price per share.  You will also realise that CN-1’s price per share is exactly 80% of Investor E’s price per share, while CN-2’s price per share is exactly 85% that of Investor E’s – the discount rate is exactly correct. 

In addition, compared to the earlier method of calculation, by using the discount rate for both CNs, the noteholders for CN-1 and CN-2 both get a better deal, in terms of price per share and number of shares – a win-win situation.  

As such, this calculation method – using the discount rate for both noteholders, rather than just CN-2 – should rightfully be used.  But this illustrates perfectly why pre-money calculations can be extremely tricky – this is so because a different method than what we expect should be correct, can end up giving investors the better deal (and consequently should be used).  This would explain why, historically, pre-money conversions are often subject to disputes and challenges.

Ambiguity… and inefficiency

In addition, pre-money conversions are highly contentious and inefficient.  Based on the above example, we had to run multiple calculation scenarios before arriving at the best deal for Company Z’s noteholders.  This effectively constitutes “Step 6” in the pre-money conversion process – checking that the calculations done actually grant the noteholders the best deal, in terms of share price and percentage shareholdings.

If you have 2 notes for conversion, you would likely need to run 2 to 3 calculation scenarios (e.g. valuation cap-valuation cap; discount rate-discount rate; valuation cap-discount rate).  Should you have more notes for simultaneous conversion, the number of calculation scenarios you would need to run in order to reach the best possible outcome is prohibitively time-consuming.  For instance, with 4 notes, you would probably need to run close to 9 or 10 calculation scenarios.

These 2 factors – calculation ambiguity and inefficiency – explain why, in recent years, there has been a general shift towards post-money calculations, which, as we have previously discussed, are easier, and provide greater clarity on the dilution and shareholdings of stakeholders involved.

Ensuring accurate calculations: Note conversions

In addition to the tips for accurate calculations covered in last week’s article, for note conversions, there is 1 other failsafe method to ensure your calculations are correct.  This method has actually already been touched on above: you can actually use the specified discount rate to ensure that your calculations are correct.  

The discount rate specified is the minimum discount, share price-wise, which the CN or SAFE noteholder must receive.  For instance, if the specified discount rate for a CN is 15% and the priced round investors receive their shares at an average of $1.00 a piece, then the CN-holder should be receiving their shares at $0.85 or less, depending on which calculation method (valuation cap or discount rate) offers a better price.  

You can simply divide the share price for the noteholder by that of the priced round investor to see just how much a discount the former has received.  Referring back to Company Z’s case study above, we did verify that the price per share for CN-1 and CN-2 correspond exactly to their discount rates.


Depending on the number of notes to be converted at a time, as well as the conversion terms, updating a CapTable to reflect note conversions is a much tricker task for founders.  

It is important to carefully ascertain whether the valuation cap or discount method should be used – for post-money conversions, this is done by calculating the discount received by the noteholder using the valuation cap approach,  and comparing this against the note’s given discount rate.

However, for pre-money conversions, both the valuation cap and discount rate methods must be performed to ascertain which gives the noteholders a better deal.  This is especially important if the calculated reference valuation caps are very close to the company’s pre-money valuation.

Fortunately, there is a good way to double check the accuracy of note conversion calculations.  Simply take the price per share for each noteholder, and divide that by the price per share received by the priced round investor(s).  The calculated discount should, in most cases, be exactly the same as the note’s stipulated discount rate, if not higher.