Our fictional investor is happy to defer valuation. It has already specified two prices at which it would prefer to buy.
The shaded passages are from our fictional note, not verbatim Cooley clauses. Comments explain the trade, suggest a counterproposal, and translate our imaginary investor’s incentives. Structural references: Cooley’s CC0 Series Seed form; the tougher selected economics and fictional commentary are ours. An ask is not an agreed change or a guarantee you will get it.
A $5 million cap and 20% discount fit in one line. Understanding that line takes the share ledger, the capitalization definition, the new-money price, and the amount converting. The cap has a denominator. Bring it to the meeting.
These examples follow this specimen, not every note. Ordinary Machines begins with five million fully diluted shares: four million founder shares and one million reserved pool shares. There are no other notes, SAFEs, warrants, or promised awards. New money is priced against that specified capitalization excluding the note.
Two prices, one winner
On the first anniversary, 8% simple interest makes $540,000 convertible. New investors put in $2 million at $10 million pre-money, paying $2 per share under our stated convention.
The discount price is $1.60. The cap price is $1. Clause 3 chooses $1, issuing 540,000 note shares. No additional 20% discount applies to that dollar. A stacked cap-and-discount would issue 675,000 shares at 80 cents; that is a different bargain.
One million new-money shares take the fully diluted total to 6.54 million. The note owns about 8.26%; cash investors about 15.29%; existing capitalization about 76.45%. That last group includes the unissued pool, not just the founders.
The arithmetic
| Case | Cash price | Cap price | Discount price | Note shares | Note ownership |
|---|---|---|---|---|---|
| $10m pre-money | $2.00 | $1.00 | $1.60 | 540,000 | 8.26% |
| $4m pre-money | $0.80 | $1.00 | $0.64 | 843,750 | 10.11% |
| $10m + pool top-up | $1.6667 | $0.8333 | $1.3333 | 648,000 | 8.26% |
Swipe or scroll the table for all columns →
Illustrative arithmetic, not a forecast or transaction-specific advice. Definitions and exclusions appear in the specimen and accompanying text.
Every row converts the same $540,000. The percentages use the final denominator including note and new-money shares. These are stated transactions, not forecasts.
When the discount does the work
At $4 million pre-money, new cash pays 80 cents. The discount price is 64 cents, below the $1 cap price. The note gets 843,750 shares and new money gets 2.5 million. Total shares become 8,343,750.
The note owns about 10.11%, existing capitalization 59.93%, and new cash 29.96%. The cap did not protect the company from a lower financing price. It protected one of the investor's ways to enter.
Dividing $500,000 by $5 million and calling it final dilution omits interest, discount pricing, the capitalization definition, and the next check. Useful coffee arithmetic; incomplete closing arithmetic.
The pool has joined the negotiation
The cap's less photogenic half
including any increase approved in connection with the financing before conversion
Read the full clause and its qualifications ↗
- What it means
- This phrase puts a financing-driven option-pool top-up into the cap denominator. Divide the fixed $5 million cap by more shares and the cap price falls. A lower price gives the note more shares for the same converting balance.
- Why it helps you
- An explicit definition is better than leaving the capitalization to be invented at closing. A realistic hiring reserve also helps the business; the question is who absorbs its dilution.
- Where it bites
- In our stated pricing model, growing the defined pool by one million shares takes the cap price from $1 to about $0.8333. The one-year note gets 648,000 shares instead of 540,000. The founders still own four million shares.
- Ask for this
- Ask to exclude a pool increase imposed by the next financing from the cap denominator, or negotiate its size and allocation explicitly. Attach the actual fully diluted share schedule, including promised awards, warrants, and every convertible. An exclusion here does not erase the pool's separate dilution.
Exclude the new financing's pool top-up from Company Capitalization for cap pricing. Keep the existing agreed reserve in the schedule and model the top-up separately.
Commercial request, not execution-ready legal language. It is not an agreed change to the specimen.Source boundary. Cooley §2.1 brackets whether reserved shares and a financing-related pool increase enter the denominator. Our specimen deliberately includes them. [1]
A one-million-share pre-closing pool increase raises the defined capitalization to six million. Under our chosen pricing convention, the cap price becomes about 83.33 cents and new money pays about $1.6667.
The note receives 648,000 shares and new money 1.2 million. Total capitalization is 7.848 million. The founders' unchanged four million shares now represent about 50.97%.
Exclude a specified top-up from cap pricing if you can negotiate it. That does not eliminate the reserve or its own dilution; it stops that reserve from also changing this particular conversion price. Put both effects in the model.
The round's definition must agree
A real priced round may allocate converting instruments differently from our example. Ask its lead and counsel for a closing capitalization schedule that implements the actual definitions. Several notes at different caps, interest balances, and pool conventions are not solved by one impressive spreadsheet cell.
Cooley's form offers alternative capitalization language.1 Fully diluted is the beginning of the definition, not the end of the negotiation.
The counterproposal with numbers attached
Send a strong-round, weak-round, and delayed-round case. Include every convertible, the pool, accrued interest, and cash raised. Ask the investor to confirm that the model expresses its proposed deal.
A higher cap helps when the cap governs. A smaller discount helps when the discount governs. Changing the interest or denominator can affect both ownership and later distributions. Compare the whole offer rather than celebrating a concession that never applies in your likely case.
We are delighted to postpone your valuation. The denominator has been available for discussion all morning.
Lower means better for the buyer
Read the full clause and its qualifications ↗
Use the lower of the cap price and 90% of the new-money price, with no stacked discount. Compare a $7 million cap against the current $5 million cap in the same three scenarios.
Commercial request, not execution-ready legal language. It is not an agreed change to the specimen.Source boundary. Cooley §2.1 offers discount pricing and an alternative lower-of cap/discount formula. These proposed cap and discount changes are our bargaining examples. [1]