TEN Capital Convertible Note & SAFE Note Calculator

Convertible Notes and SAFE Notes are often used to launch a fundraise. In the early stages of the company, it’s difficult to set valuation. The Convertible Note and SAFE Note lets you take funding without going through the valuation process.

A convertible note is a debt instrument that converts to equity later. The TEN Capital Convertible Note Calculator provides the amount of equity a convertible note takes upon conversion.

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Step 1 of 2 - Personal Information

First, the interest rate is calculated and added to the note value.

Second, the calculator shows the conversion using both Discount and Valuation Cap.

Third, the lesser of the Discount and Valuation Cap is used and calculates the value of the shares and percent ownership of the company it represents.

A SAFE note (simple agreement for future equity) is a convertible security that acts like a warrant which allows the investor to buy shares in a future priced round.

SAFE notes are simpler than convertible notes and come in many variations with respect to having a Valuation Cap or discount.

  1. Discount: The number used to determine the price at which the note converts to equity. It gives the
    holder additional shares based on the amount of the discount.
  2. Valuation Cap: The maximum valuation on which the discount will be applied.
    Investment: The dollar amount invested in the Note.
  3. Interest Rate: The annual interest rate applied to the investment amount.
  4. Pre-money valuation: The value of the company Before the investment round.
  5. Post-money valuation: The value of the company After the investment round which equals the investment added to the pre-money valuation.
  1. Investment (in dollars) – How much the investor is investing.
  2. Interest rate in percent – The amount of interest that will accumulate.
  3. Discount in percent – The amount of discount to the equity version
  4. Valuation Cap in dollars – The rate at which the Convertible Note will convert to equity without a funding event
  5. Date of Convertible Note Funding – The date the note is signed and funded
  6. Date of conversion to equity – The date the convertible note converts to equity

Days of interest accrued – Number of days the interest accrued
Interest accrued – The amount of interest accrued
Value of Convertible Note with interest – The value of the convertible note with interest added

Conversion using discount
Next round price per share – The price per share based on the next round of funding.
Discounted next round price per share – The next round of funding price per share with the discount included.

Conversion using Valuation Cap
Total number of shares at next round – The number of share outstanding at the next round
Price per share – The price per share at the next round of funding

Conversion Used (Discount or Valuation Cap)
Selecting the lesser of discount or valuation cap methods:

  • Share Price for conversion – The price per share at conversionShares purchased – The number of shares purchased at conversion
  • Value of shares – The dollar value of the converted note shares
  • Percent ownership – How much ownership in percent of the converted note shares.

A commonly used investment tool for funding startups is the convertible note. It’s a short term debt instrument that converts into equity later. If the issuer wants a debt instrument without conversion to equity, a promissory note would be a better option. With a convertible note, the investor receives accruing interest while holding the note. It works well for seed stage startups as it removes the burden of a complex equity-based terms sheet which requires details on control and boards, and avoids issues of dilution and taxes. It’s easy to set up compared to most equity term sheet which can be quite costly to develop since valuation must be negotiated and set at the time of signing.

A convertible note has three components which are the interest rate, discount rate, and valuation cap rate. The interest rate determines the annual interest that will accrue. The interest is not meant to be paid out monthly or quarterly like a bank loan but will convert to equity later along with the principle. The discount rate is the amount of additional equity the investor will receive when the note converts to equity as compensation for investing early. The valuation cap rate determines how much equity the investor will receive upon conversion.

The conversion from debt to equity is usually based on a future financing round. If there is no follow on financing round, then the note often sets a time limit (say 5 years) at which point it will convert at the cap rate.

The interest rate is typically a simple interest rate. If the price per share is $4 and the interest rate is 10%, then the investor receives $4*.10= $0.40/share in the form of interest.

The discount rate gives a reduced price to the convertible note holder. If the price per share is $4 and the discount is 15%, then the note holder receives their share at a price of ($4 * (1-.15)) = $3.40.

The cap rate sets a maximum limit at which the convertible note can convert to equity. For example, if the cap rate is $3M and the next round of financing comes in at $5M, and the share price is $4. Then the price per share to the convertible note holder is $2.40. (3/5=.6; $4*.6=$2.4).

The convertible note works well for investors who want to invest relatively small amounts. Investors seeking to make large investments typically want valuation set, board seats determined, and control provisions set which often requires an equity terms sheet. The convertible note is a useful tool for early stage startups where there are still many unknowns about the deal.