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Q

Numerical Example: $25k convertible note with no cap, 20% discount

A

Let’s do a simple numerical example ignoring any accrued interest:

  1. You invest $25k in a startup’s seed round using a convertible note with a 20% discount

  2. At the Series A, the startup raises money from a venture capital firm that pays $5.00 per share of Series A Preferred Stock

  3. Your $25k loan would convert into shares of Series A Preferred Stock at a price of $4.00 per share ($5.00 times (1 minus 20%)) which gives 6250 shares of Series A Preferred Stock ($25,000 divided by $4.00/share); a new Series A investor would receive only 5000 shares of Series A Preferred Stock for $25k

  4. On paper, your 6,250 shares at $5.00/share are worth $31,250 which is an unrealized return of 25%

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