There are 3 different calculation methods to calculate the price per share to which a note converts at, each differing in the variable being fixed: the Pre-Money Method, Percentage-Ownership Method, and the Dollar Invested Method.
• The pre-money method benefit the founder as they don’t get diluted as much as in the other methods.
• The percentage ownership is the method that favors the investors and noteholders.
• And finally, the dollar invested method is a compromise between the two other methods, where everyone gets slightly diluted.
Generally, the percentage ownership is most often used, as new incoming investors have the most leverage. But founders and business owners must understand the difference between each method so they can negotiate a deal that works for all parties.
It may seem complicated at first, but don’t worry!
Use this Convertible Note Calculator and find what works best for your company!
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