Auditing Authorized Corporate Shares Prior to Equity Commitments
Auditing authorized corporate share counts against executed commitments identifies unallocated equity deficits prior to legally binding equity issuances.
valuation cap conversion
Meaning
Transformation of debt into equity based on a fixed price limit protects early investors from high valuations in subsequent rounds. This valuation cap conversion determines the maximum price per share that a note holder will pay, regardless of what new investors are paying. It ensures that those who took the earliest risks receive a larger percentage of the company.
Price Math
The conversion price is found by dividing the cap by the number of shares existing just before the new round. If the company is valued at twenty million but the cap is five million, the note holder gets four times as many shares as the new investors for the same dollar amount. This math creates a significant difference in ownership.
Every calculation is performed by legal counsel to ensure compliance with the note terms.
Dilution Reality
Founders bear the weight of this conversion because the extra shares issued to the note holders come out of the founder equity. High caps or low caps significantly alter the final cap table after a round. Understanding this impact requires modeling several different valuation scenarios before the debt is issued.
Closing Process
The actual conversion happens as part of the legal closing of the equity round. Legal counsel calculates the final share counts based on the total capital raised and the specific terms of each note. This results in a new cap table where the debt is replaced by stock.