
The Pre-Money vs. Post-Money Confusion with Convertible Notes - aaronbrethorst
http://www.feld.com/archives/2015/06/pre-money-vs-post-money-confusion-convertible-notes.html
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hobbyjogger
Feld has a lot of great insights into venture finance, but this post isn't as
characteristically on point. Notes don't convert on a pre-money or post-money
basis. They just convert at whatever price the cash investors get (subject to
any discount) or at a price equal to [$ Cap Amount]/[# of Fully diluted shares
prior to the financing].

So this really has nothing to do with the notes and everything to do with the
cash investor's failure to specify in the termsheet. Unless it's expressly
pointed out that what ever pre-money valuation is being offered must include
any note conversions, then it seems relatively straightforward that the pre-
money would include fully-diluted shares (typically the founders' stock and
any option grants). This has nothing to do with the terms of the note--it is
simply a matter of what the investor is "valuing" when he gives a pre-money
valuation. Don't blame the terms of the notes for a problem that is created by
the cash investor's miscommunication.

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paulsutter
Doesn't it seem simpler and clearer to specify the cap as a share price,
instead of a valuation, in the capped note?

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hobbyjogger
It would be simpler for sure, but there's no way to be sure of the future
(i.e., at the financing) relationship between share price and overall
valuation. This is because, of course, the noteholders can't know how many
shares will be outstanding at that point.

If you wanted to translate a $5MM cap, for example, into the equivalent price
per share, you need to know how many shares are involved. The noteholders
don't know what that number will be when they enter into the notes.

