Convertible Note & Cap Table Math Guide for Arizona

What this calculator does

Run this scenario in DocketMath using the Convertible Note Cap Table calculator.

DocketMath’s Convertible Note & Cap Table Math Guide for Arizona (the convertible-note-cap-table calculator) helps you model how a convertible note converts into equity and how that conversion changes a cap table.

In plain terms, the tool turns these items into a clear ownership result:

• Pre-money valuation used for conversion pricing (or the note’s valuation basis)
• Discount rate (if the note includes a discount)
• Conversion cap (if the note includes a valuation cap)
• Next financing price per share (or a proxy for share valuation)
• Note principal and any accrued interest (if you model interest)
• Conversion mechanics (e.g., whether the note converts based on the lower of two formulas)

It also outputs:

• Conversion price per share
• Number of shares issued upon conversion
• New ownership percentages for the noteholder and existing shareholders after dilution

Tips for accuracy

• Match the document’s “lower of” language. If your note says “lower of the discount price and the capped price,” use that exact logic. If it uses a different ordering (or a floor), results can differ.
• Be consistent about inputs (price vs. valuation basis). A common error is mixing a price-per-share assumption with an implied per-share calculation derived from a valuation cap without aligning the underlying structure.
• Check whether the financing price is based on pre-money or post-money. Many disputes come from inconsistent interpretation of the pricing reference point.
• Model interest correctly if your agreement compounds or changes the amount. Some notes add accrued interest to principal for conversion; others do not or handle it differently.
• Watch rounding rules. Share counts are often rounded (or not) in specific ways per the agreement or the tool’s approach—small rounding differences can affect percentages.
• Validate with sanity checks. Ensure:

  • conversion shares ≈ total convertible amount ÷ conversion price
  • post-conversion ownership percentages sum to ~100%

If you want to explore the underlying assumptions your note agreement may use, compare your draft terms against the calculator’s mechanics and confirm with the actual document wording.

When to use it

Use DocketMath when you need to quantify how a convertible note affects ownership—especially in situations that tend to produce disputes because the math is easy to misunderstand.

Common triggers:

• A priced equity financing is happening and the note converts into shares based on the financing price.
• You’re checking whether a valuation cap is the driver of conversion (cap-based pricing) or whether the discount is the driver.
• You need to estimate dilution for:

  • founders,
  • existing investors,
  • SAFEs/notes,
  • and employee option pools.
• You’re revisiting historical models (e.g., “Did we calculate the conversion price correctly using the cap or the discount?”).

Arizona-specific reminder (about deadlines, not conversion math)

If you’re dealing with disputes or enforcement tied to a transaction timeline, Arizona has a 2-year statute of limitations for certain criminal-related matters under A.R.S. § 13-107(A) (with other related exceptions such as A.R.S. § 13-107 including 3 years under a different exception labeled here as P3).

• A.R.S. § 13-107(A): 2 years (exception O2)
• A.R.S. § 13-107: 3 years (exception P3)
  Source: https://www.findlaw.com/state/arizona-law/arizona-criminal-statute-of-limitations-laws.html?utm_source=openai

Step-by-step example

Below is a numeric walkthrough you can mirror in the DocketMath tool. To keep this practical, we’ll use standard convertible note modeling assumptions: discount vs. cap determines the effective conversion price, and the note converts at that lower price.

Example inputs (assume these in the tool)

Transaction

• Next financing includes a priced round with a stated price per share: $2.00

Convertible note economics

• Note principal: $500,000
• Accrued interest included in modeled amount: $25,000
• Total convertible amount: $525,000
• Valuation cap: $8,000,000
• Discount rate: 20%

Conversion basis

• Pre-money valuation used for the discount formula: $10,000,000

Assumption for math structure

• Conversion price is computed using both:

  1. Discount price based on pre-money valuation
  2. Cap price based on the valuation cap
• Effective conversion price = lower of the two

Step 1: Compute the discounted conversion price

Discount-based pricing typically applies a discount to the financing price or, depending on the contract, to an implied per-share value from the pre-money valuation.

For modeling with a known financing price per share:

• Discounted price = $2.00 × (1 − 0.20)
• Discounted price = $2.00 × 0.80
• Discounted conversion price = $1.60

Step 2: Compute the cap-based conversion price

Cap-based pricing determines the implied per-share value if the note converts as if the company were valued at the cap.

Common modeling approach:

• Implied cap-based price = (Pre-money price per share equivalent) derived from cap vs. pre-money.

To keep consistent with the financing price per share $2.00 and pre-money $10,000,000:

• If $2.00 is based on a $10,000,000 pre-money structure, then the implied valuation ratio is:

  • Cap ratio = $8,000,000 / $10,000,000 = 0.80
• Cap-based price = $2.00 × 0.80 = $1.60

In this example, the cap produces the same price as the discount. Your tool will handle the formulas you select, but the conceptual outcome is:

• Discount price = $1.60
• Cap price = $1.60
• Effective conversion price = $1.60

Step 3: Compute conversion shares

Total convertible amount = $525,000.

• Conversion shares = $525,000 / $1.60
• Conversion shares = 328,125 shares

Step 4: Apply dilution to build the updated cap table

To show how ownership changes, we need baseline fully-diluted shares (before conversion) and what new shares are issued in the priced round.

Assume the company currently has:

• Existing shares outstanding (fully diluted, before round): 2,000,000
• New money raises in the round at $2.00:

  • Round size: $1,000,000
  • New shares issued = $1,000,000 / $2.00 = 500,000

Now we add the note conversion shares:

• Post-round shares (after conversion)
  = existing 2,000,000

  • new round 500,000
  • note conversion 328,125
    = 2,828,125 shares

Step 5: Ownership percentages

• Noteholder ownership % = 328,125 / 2,828,125
  = 11.6% (approx.)

• Existing shareholders ownership % = 2,000,000 / 2,828,125
  = 70.7% (approx.)

• New investors ownership % = 500,000 / 2,828,125
  = 17.7% (approx.)

Step 6: Validate against the tool’s output

When you run these inputs in DocketMath, check:

• Conversion price equals the lower of discount vs. cap (when applicable)
• Conversion shares are consistent with total note amount / conversion price
• Post-conversion ownership percentages sum to ~100%

Common scenarios

Convertible notes rarely convert “one size fits all.” Use DocketMath to quickly map outcomes under realistic scenario variations. Below are common scenarios and what they do to the outputs.

1) Discount-only notes (no valuation cap)

What changes

• Effective conversion price is driven solely by the discount formula.
• Cap price is ignored or not provided.

Output impacts

• Conversion price typically stays closer to (or below) the discount-derived value.
• Conversion shares increase as discount increases (e.g., 10% discount vs. 25% discount).

Checklist for inputs:

2) Cap-only notes (no discount)

What changes

• Effective conversion price is driven solely by the cap.
• The cap becomes the limiting factor.

Output impacts

• If the company grows before the priced round, the cap can substantially reduce the conversion price.
• If growth is modest, the cap may not bind (depending on how the contract defines the conversion floor).

Checklist:

3) Both cap and discount (lower price wins)

What changes

• The calculator chooses whichever results in the more favorable (lower) conversion price to the noteholder, based on the chosen mechanics.

Output impacts

• Small changes to cap/

Related reading

• Inputs you need for convertible note cap table math in United States (Federal) — Input checklist with sourcing guidance
• Worked example: convertible note cap table math in North Carolina — Worked example with real statute citations
• Convertible note cap table math in California — Full how-to guide with jurisdiction-specific rules