- How to create a convertible instrument?
In Administration section go to Portfolio Companies -> Investments and create a new investment with the type “Convertible”. Apart from picking the Investment Vehicle and Portfolio Company for this investment, you can also specify interest rate, conversion factor and whether the convertible has already been converted or not (and if so, on which date)
After creating the Instrument itself, you can now create Investment Rounds. Convertible investment contains debt rounds by default, and if it has been converted already, it starts having also equity rounds.
Typical use case is as follows:
- You create one debt round “Issuance of convertible note”
- You create another debt round “Conversion”
- You create equity round “Conversion”, specifying captables before and after the round
Note: please make sure that the relevant captables are created beforehand and that the shareholder related to your fund is marked as “Affiliated Entity” in the shareholders list. In this case the acquired stake will be calculated correctly.
After you’ve created the Investment Rounds, you can go to Accounting section and tie specific transactions to the rounds.
2. How is convertible valued?
After the conversion has occurred, the convertible is valued based on the equity rounds. The equity rounds are summed up, deriving the current stake, and multiplied by the latest valuation of the company.
Before the conversion has occurred, the convertible is valued at a maximum of:
- equity valuation. The number of shares is calculated using the conversion factor of the convertible instrument. For instance, if the conversion factor is 1000 and the convertible face value is $1,000,000, this means that once converted we will get $1,000,000 / 1000 = 1000 shares. These shares are added to the captable active as of the valuation date and the derived acquired stake is multiplied by the corresponding company valuation.
- debt valuation. It is derived as recovery rate multiplied by the face value of the instrument (sum of all debt rounds).