A convertible debt round allows Investors to invest into a debt instrument, which will later convert into equity. For early stage investors in convertible debt, it is usually the intention that there will be a conversion into equity at some point

Terms relating to convertible debt
A convertible debt round will either have a Valuation Cap or a Conversion Discount, or both:

• Valuation Cap: the maximum valuation an investor will convert their investment into shares;
• Conversion discount: the discount to the valuation in the equity round that converts the investors investment

How to Convert
To calculate the conversion of a Convertible Debt investment, we need to know (as well as Valuation Cap and Conversion Discount):

• Investment Amount: the amount invested in the round. This may be equal to the original investment, or the original investment plus accrued interest (often a Convertible Debt round may attract interest which is rolled up
• Valuation: the pre-money valuation of the round which converts the Convertible Debt. This is usually a Series A round or similar.
• Number of shares outstanding: the total number of shares outstanding before the converting round

First we will work out which Valuation to use. This is the lower of:

• Valuation Cap: the maximum valuation as agreed when the investment was first made
• Discounted Valuation: the pre-money valuation of the current round, less the Conversion Discount

Next, we will calculate how many shares to issue to the Convertible Debt holders
The number of shares to issue = (Investment Amount / Valuation) * Number of Shares Outstanding

Why use convertible debt
A Convertible Debt Round enables a Founder to raise money, without the need to set an exact valuation. Instead, the Founder and Investor agree a Valuation Cap and/or a Conversion Discount. Also, the convertible debt round can be left open for some time, enabling investors to invest over a period of time

Worked Example:

Let's say:

• A seed investor invests \$500k into a Convertible Debt round with a Conversion Cap of \$4M and a Conversion Discount of 15%
• The company has 100,000 shares outstanding

Example 1: a VC invests \$2.5M on a pre-money valuation of \$5M

• First, we work out which valuation to use. The lower of:
1. the pre-money valuation: \$5M
2. the Conversion Cap: \$4M
3. the Conversion Discount applied to the Pre-Money Valuation: 15% off of \$5M = \$4.25M
• So we use the Conversion Cap valuation of \$4M to convert
• The Investors in the Convertible Debt round get 100,000 * (\$500k / \$4M) = 12,500 shares

Example 2: a VC invests \$2.5M on a pre-money valuation of \$4M

• First, we work out which valuation to use. The lower of:
1. the pre-money valuation: \$4M
2. the Conversion Cap: \$4M
3. the Conversion Discount applied to the Pre-Money Valuation: 15% off of \$4M = \$3.4M
• So we use the Conversion Discount valuation of \$3.4M to convert
• The Investors in the Convertible Debt round get 100,000 * (\$500k / \$3.4M) = 14,705 shares
Modelling using Reportally:

You don't need to worry about any of these mechanics, as its all done for you in Reportally's Cap Table builder!

1. Add a new Debt Round
2. In the round options you'll see Valuation Cap and Conversion Discount: put in the values you want
3. Click "Save" and you're done!

When you later add an Equity round, or a Valuation, the Cap Table builder will automatically calculate the Conversion and Returns calculations for you.

Level:
Introductory

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