I have not done a ton of startup-specific financial modeling tools related to raising money (specifically the effect on your cap table). I believe this template will help founders understand their cap table and what happens when they decide to raise money through a convertible note and/or a new equity round.
$45.00 USD
After purchase, the template will be immediately available to download. It is also included in the Super Smart Bundle, Sensitivity Tables bundle, Valuation Models bundle, and the Accounting Tools bundle.
Template Features:
- Detailed pre and post-money cap table.
- Robust data entry for up to 5 initial stakeholder groups.
- Model a convertible note and/or a new equity round.
- Includes 2 sensitivity tables, showing the dilution effect based on sensitizing key variables.
- Includes a chart that shows the ownership structure pre and post-money or post-conversion.
- User-friendly with input cells highlighted in yellow with blue text.
- Fully editable and unlocked Excel sheet.
A well-designed Excel template for modeling convertible notes is invaluable for founders, investors, and finance professionals who want to understand the potential effects of a convertible note round on the company's ownership and dilution over time. Below is an overview of why such a template is useful, along with key factors and inputs that should be considered.
1. Usefulness of a Convertible Note Modeling Template
a. Scenario Analysis
- Convertible Trigger Events: The template allows you to see what happens under different “trigger” conditions—such as a priced equity round, sale of the company, or maturity of the note. This is all controlled through the 'pre-money valuation' input under the 'Next Round' section. Essentially, 'Next Round' can also be called 'trigger event'.
- Sensitivity Testing: By adjusting key inputs (valuation cap, discount rate, interest rate, and subsequent round valuations), you can quickly see how each affects dilution and ownership percentages. Data tables have been utilized for this in the above model.
b. Capturing Complex Terms
- Valuation Caps & Discounts: Convertible notes often include a valuation cap and/or discount on the next equity round. The template calculates how these interact when determining the conversion price.
- Accrued Interest: Interest on the note adds to the principal over time, increasing the investor’s ultimate share of the company if not repaid in cash.
- Multiple Conversion Conditions: Different scenarios (e.g., forced conversion at maturity, optional conversion, or automatic conversion in a priced round) each require different calculations for the final ownership stake.
c. Cap Table Visualization
- A robust Excel model integrates the convertible note calculations into a dynamic “post-financing” cap table. This helps founders and investors see real-time ownership stakes of common shareholders, seed investors, note holders, etc.
d. Negotiation & Strategic Decision-Making
- Founders can see how different note terms would impact their ownership once notes convert. Investors can ensure that convertible instruments’ structure reflects their return expectations.
- This immediate feedback is vital during term sheet negotiations, or when projecting outcomes for potential future exits.
2. Key Factors and Inputs
a. Principal Amount of the Note
- Invested Capital: The total dollars loaned to the company.
- Tranches: Some companies raise convertible notes in multiple tranches at different times and with different terms; your model should account for each tranche separately.
b. Valuation Cap
- A critical term that caps the valuation at which notes convert into equity.
- Example: If the valuation cap is $5 million, but the company’s priced round is at a $10 million valuation, the note will convert as though the post-money (or pre-money, depending on the structure) valuation is $5 million, thus granting a larger ownership stake to the note holder.
c. Discount Rate
- Note holders often receive a discount (e.g., 20%) to the next round’s share price.
- The Excel model must automatically compare the price per share via the valuation cap versus the price discount and choose the more note-holder-favorable option (which is typical in most note terms).
d. Interest Rate (and Accrual)
- Accrued Interest: Convertible notes often carry an annual interest rate (e.g., 5–8%). Over time, interest adds to the principal, increasing the amount that eventually converts.
- Modeling Detail: The Excel should include time-based formulas, so if the note has been outstanding for a certain number of months, the interest is calculated proportionately.
e. Maturity Date and Conversion Mechanics
- Maturity: If the note does not convert before its maturity date, certain clauses may trigger. Some notes convert automatically at maturity, while others might grant investors more control.
- Conversion Price: The Excel must properly pick the conversion price based on whichever clause or threshold is triggered.
f. Next Equity Financing Round Assumptions
- Timing: When the next round is projected to happen.
- Valuation: The assumed pre-money or post-money valuation at which new investors will come in.
- New Money Raised: How much capital will come in at that round, and how that changes the overall ownership distribution.
g. Post-Financing Cap Table
- Ownership Breakdown: Illustrate changes in ownership for founders, employees, existing investors, convertible note holders, and new investors.
- Fully-Diluted Shares: Include stock option pools and other outstanding instruments (e.g., SAFEs, warrants).
3. Core Components of a Convertible Note Excel Template
Inputs & Assumptions Sheet
- Principal amount
- Interest rate and start date for note
- Valuation cap and discount rate
- Next financing assumptions (valuation, amount raised, date)
Calculations Sheet
- Accrued Interest: Principal × (annual interest rate) × (time outstanding)
- Effective Conversion Price: Based on the lesser of (i) capped price or (ii) discounted price
- Ownership & Dilution: Calculation of how many shares convert to the note holders and the new total shares outstanding
Cap Table Overview
- Summarizes pre-financing ownership, convertible note conversion, and post-financing ownership
- Highlights changes in ownership percentages for each stakeholder group
Scenarios / Sensitivity Analysis
- Data tables that vary the valuation of the subsequent equity round or the interest rate to see different outcomes
- Potential forced conversion at maturity versus conversion in a typical funding round
Charts & Graphs (Optional but Helpful)
- Visual representations of ownership % under different valuations
- Timeline-based chart for note conversion if desired
4. Benefits in Practice
Clarity & Transparency
- Both founders and investors can see the precise mechanics that determine the final ownership stake.
- The data-driven approach reduces misunderstandings and promotes fair negotiations.
Negotiation Leverage
- A robust model helps show the impact of adjusting parameters like the valuation cap or discount rate on the founder’s share.
Investor Relations
- Potential investors appreciate seeing that a company has professional, well-organized financial modeling—often helping build credibility.
Future-Proofing
- A good template can be reused or expanded for subsequent rounds of convertible notes or SAFEs, providing a foundation for your financing strategy.
5. Common Pitfalls to Avoid
Not Accounting for Fully Diluted Shares
- Excluding option pools, warrants, or other outstanding instruments can understate dilution and lead to incorrect ownership calculations.
Misalignment of “Cap vs. Discount”
- Failing to correctly pick the more note-holder-favorable method when comparing the valuation cap price to the discounted share price.
Ignoring Post-Money vs. Pre-Money Distinctions
- Some convertible instruments reference pre-money valuation, others post-money, which can dramatically change results.
Neglecting Maturity Scenarios
- If the note reaches maturity without a new round or exit event, your model should reflect what conversion looks like then—sometimes at a less favorable price for the company.
Overcomplicating or Undercomplicating
- It’s crucial to maintain a balance of detail and usability. Too many macros or hidden cells can make the model error-prone; too few details make it incomplete.
Potential Future Features or Customization Ideas:
- Multiple Financing Rounds: You can layer multiple rounds of convertible notes and view the compounded effect on ownership and valuations over time.
- Show a potential exit at some year in the future and the resulting distributions. This is something that would vary per situation so it falls into a customization request.
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