Question

In: Accounting

Suppose you invested $50,000 in a startup with a 10% convertible note. After one year, the startup receives a $500,000 investment from a different

Suppose you invested $50,000 in a startup with a 10% convertible note. After one year, the startup receives a $500,000 investment from a different investor (at a $2million postmoney valuation). Which of the following statements is true?

A. After conversion, you will own approximately 2.75 percent of the company

B. After conversion, you will have 50,000 shares of the company and $5,000 in cash

C. Before conversion, you own approximately 2.5 percent of the company

D. All of the above are true

E. None of the above are true

Solutions

Expert Solution

B. After conversion, you will have 50,000 shares of the company and $5,000 in cash.

 

Statement B is correct.

The discount for the convertible note or SAFE is calculated by dividing the valuation cap by the traditional equity financing valuation and then subtracting that value from 1 (representing no discount). In this example such would be portrayed mathematically as $50,000 = 0.5 and 1 – 0.5 = 5,000.

B. After conversion, you will have 50,000 shares of the company and $5,000 in cash.

Junaid answered 1 year ago
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