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Startup Cap Table and Equity Dilution Calculator

This template helps startup founders compile their capitalization table and calculate the Equity Dilution from fundraising with Convertible Notes and SAFEs.

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Convertible Note

What Is It?

Convertible Note is a legal document that is nothing more than a loan with a twist. It’s just like a regular loan with an interest rate and maturity.

The twist is that the investor has the option to convert the loan and the accrued interest into an equity stake in the company.

Standard Terms

Rate: The standard terms are usually an interest rate range between 8% and 10%.

Maturity: The loan is typically payable within 2 or 3 years.

Conversion: At maturity, or sooner if triggered by a financing round, the investor gets a choice to convert the principal plus interest into equity.

Simple Agreement for Future Equity (SAFE)

What Is It?

SAFEs are a legal document that is nothing more than the name suggests, a promise. It’s a legal promise that in exchange for an investment, the founder will give the investor an equity stake in the company at a later date.

Standard Terms

Valuation Cap: SAFEs generally just state a Valuation Cap.

Interest & Maturity: Unlike Convertible Notes there usually is no interest or maturity date with SAFEs.

Conversion: Generally conversion is triggered by a "qualified financing round" - this amount is usually defined in the agreement, but normally it's the very first "priced round"

Valuation Caps Explained

The Valuation Cap is often referred to as the "Valuation" of the business; however, that's only partially true.

Valuation Caps are the implied MAXIMUM that the investor and founder agree is the value of the company - the value can be lower if a future funding round is priced below the valuation cap.

Both SAFEs and Convertible Notes often have Valuation Caps - although some SAFEs and Convertible Notes don't have valuation caps, it's fairly rare.

Can I have different investors with different valuation caps? The easy answer is Yes.

Investor Can Get a Lower Price than Valuation Cap

At the conversion, the Convertible Note or SAFE will generally convert into equity at a valuation no higher than the valuation cap, but if the value comes in below that (what is referred to as a “down round”) then the original investment will convert at the lower value.

This way the investor ensures the best price for themselves.

Valuation Cap and Why It's Not the Value

Maximum Value

Valuation Caps are the implied MAXIMUM that the investor and founder agree is the value of the company.

Why is that even a distinction you might think? Well, it’s important because the investor can get a lower price than the valuation cap when the convertible vehicle converts to equity.

If you’ve read up on SAFEs and Convertible Notes, you’ll know that neither of them are equity, until they convert to equity

Down Round Protection

At the conversion, the convertible vehicles will convert into equity at a valuation no higher than the valuation cap.

But if the value comes in below the Valuation Cap (what is referred to as a “down round”) then both SAFEs and Convertible Notes will convert at the lower value.

This way the investor ensures the best price.

Equity Conversion

You'll note that "conversion" is a commonly used term here and it refers to the fact that neither SAFEs nor Convertible Notes start as equity.

They are designed to convert to equity at a later date when the value of the startup can be determined more clearly. The conversion and valuation cap is described here.

There are two steps to the conversion process.

The mechanical step is where you calculate the shares and ownership stake and
The legal where lawyers draw up the legal docs and issue actual stock to the investors.

The Conversion Trigger

What It It?

In nearly every case, another financing round triggers the conversion of these convertible vehicles into equity. Financing rounds are often named as “Pre-Seed”, “Seed”, “Series A, B,C” etc.

The names don’t mean much, they’re not standardized and many people refer to them differently.

What matters; however, is whether the financing round is a “priced round”.

Sometimes you will have other pre-negotiated instances that trigger conversion, but for the sake of ease, we're only going to focus on the standard.

Priced Round

The financing round that triggers conversion is a “priced round” because that’s the first time when the company’s value is determined by a cohort of investors (i.e. market).

The legal documents refer to this financing round as a “Qualified Financing” or something similar. The definition for a qualified financing round varies - sometimes it’s a specific dollar amount and sometimes it's more vague than that.

For the sake of ease, just think of a “Qualified Financing” and “Priced Round” as the same and know that it usually implies that it has to be “large enough to matter”.