Convertible note cap table math in Australia

Modeling how convertible notes hit your cap table in Australia can get messy fast: discounts vs caps, multiple note rounds, and tricky pro‑rata rights. This guide walks through how the math works and how to model it in DocketMath’s Convertible Note Cap Table calculator for Australian startups and investors.

Quick takeaways

• Convertible notes in Australia usually convert on a priced equity round (the “qualifying financing”), using a discount, a valuation cap, or both.
• Your cap table outcome depends heavily on:

  • Whether notes convert at the discount price or cap price.
  • Whether the cap is pre‑money or post‑money.
  • Whether interest is added to the principal before conversion.
  • Whether notes convert before or after ESOP top‑ups.
• DocketMath lets you:

  • Input multiple notes with different terms.
  • Choose discount, cap, or “better‑of” logic.
  • Toggle ESOP sizing and see fully diluted ownership instantly.
• This article is about math and modeling, not what terms you should agree to. For deal terms, you’ll need professional advice.

Inputs you need

To model your Australian convertible notes in DocketMath, gather these inputs first. You’ll need both company‑level and note‑level details.

Use this intake checklist as your baseline for Convertible Note Cap Table work in Australia.

• note principal balance
• valuation cap
• discount rate
• pre-money valuation
• round size and option pool
• conversion timing

If any of these inputs are uncertain, document the assumption before you run the tool.

1. Company‑level inputs

These describe your cap table and round terms at the time of the equity financing.

• Pre‑money valuation (equity round)

  • The agreed valuation for the new equity round.
  • In AU deals, this is usually pre‑money, but check the term sheet.

• New money raised in the round

  • The total cash from new equity investors (excluding the notes).

• Existing ordinary shares on issue

  • All fully paid ordinary shares before the round.
  • Include founder, employee, and early investor ordinary shares.

• Existing preference or other share classes (if any)

  • Number of shares and whether they convert 1:1 into ordinary on a liquidity event.
  • For basic modeling, you can usually treat them as ordinary on an as‑converted basis.

• Employee share option plan (ESOP)

  • Current ESOP pool size (granted + unallocated).
  • Target ESOP pool after the round (e.g. “15% post‑money, fully diluted”).
  • Whether the ESOP top‑up happens before or after note conversion (you’ll need to check your term sheet and note docs).

2. Note‑level inputs

For each convertible note (or series of notes with identical terms), collect:

• Principal amount (AUD)

  • The face value invested under the note.

• Interest rate and compounding

  • Typical structures:

    • Simple interest (e.g. 8% per annum, non‑compounding).
    • Compounding annually or monthly.
  • Confirm whether interest is cash‑payable or capitalised (added to principal).

• Issue date and expected conversion date

  • Needed to calculate accrued interest.

• Discount rate

  • e.g. 15–30% discount to the equity round price.
  • Conversion price at discount:
    [ \text{Discount Price} = \text{Round Price} \times (1 - \text{Discount}) ]

• Valuation cap

  • The maximum valuation used to calculate the conversion price.
  • Check if the cap is defined as:

    • Pre‑money (most common), or
    • Post‑money (less common but increasingly used).

• Discount vs cap logic

  • Many AU notes say the investor gets the better of:

    • the discount price, and
    • the cap price.
  • Others say cap only or discount only.

• Conversion trigger

  • Usually an equity financing above a specified minimum raise (e.g. A$1m).
  • For modeling, you just need to know: “Is this round a qualifying financing?” (Yes/No).

• Conversion into which class of shares

  • Often the same class as the new money (e.g. Series Seed Preference).
  • Sometimes into ordinary shares. That changes relative economics and may affect ESOP calculations.

• Any conversion premium or floor

  • Some notes include:

    • A minimum price (floor) to avoid over‑dilution of founders.
    • A premium for change‑of‑control scenarios.
  • For a standard equity round, you usually focus on discount and cap.

DocketMath’s calculator lets you add each note as a separate row, so you can see how different terms interact on the same cap table.

How the calculation works

This section focuses on the math mechanics that DocketMath applies, not the legal interpretation of any specific document. Always read the actual note terms.

DocketMath applies the Australia rule set to the inputs, then runs the calculation in ordered steps. It validates the trigger date, applies rate or cap logic, and produces a breakdown you can audit. If you change any one variable, the tool recalculates the downstream outputs immediately.

Step 1: Compute the baseline round price

Assume:

• Pre‑money valuation (V_pre)
• Existing shares pre‑round (S_existing)

Baseline share price:

[ P_{\text{round}} = \frac{V_{\text{pre}}}{S_{\text{existing}}} ]

If your term sheet defines valuation on a fully diluted basis (including ESOP and/or notes), the formula changes. DocketMath supports both approaches:

• Simple pre‑money: price based on current issued shares.
• Fully diluted pre‑money: price based on current issued + in‑the‑money options + notes as if converted.

You select the appropriate option in the calculator.

Step 2: Calculate accrued note amount

For each note:

1. Determine the time period from issue date to conversion date.
2. Apply the interest formula:

• Simple interest: [ A = P \times (1 + r \times t) ]
• Compounding annually: [ A = P \times (1 + r)^t ]

Where:

• (P) = principal
• (r) = annual rate
• (t) = time in years
• (A) = principal + interest at conversion

DocketMath does this automatically once you give it principal, rate, and dates.

Step 3: Compute discount price and cap price

For each note, DocketMath calculates:

• Discount price (if applicable): [ P_{\text{discount}} = P_{\text{round}} \times (1 - \text{Discount}) ]

• Cap price (if applicable):

  For a pre‑money cap:

  • Let (V_{\text{cap}}) be the cap.
  • Depending on the definition in the note, the denominator may be:

    • existing shares only, or
    • fully diluted shares (including ESOP targets, etc.).

  A common simple version:

  [ P_{\text{cap}} = \frac{V_{\text{cap}}}{S_{\text{existing}}} ]

  For a post‑money cap, the valuation definition changes; the calculator allows you to choose the correct method for your document.

Step 4: Choose the effective conversion price

DocketMath then applies the logic from the note:

• Discount only

  • Conversion price = (P_{\text{discount}}).

• Cap only

  • Conversion price = (P_{\text{cap}}).

• Better of discount or cap (very common in AU)

  • If the note says the investor gets the lower price (i.e. more shares): [ P_{\text{conv}} = \min(P_{\text{discount}}, P_{\text{cap}}) ]

• Worse of discount or cap (rare)

  • Sometimes used as a founder‑friendly compromise: [ P_{\text{conv}} = \max(P_{\text{discount}}, P_{\text{cap}}) ]

You select this rule per note in DocketMath.

Step 5: Convert note amount into shares

For each note:

[ \text{Note Shares} = \frac{A}{P_{\text{conv}}} ]

Where (A) is principal + interest at conversion.

These shares are added to the cap table as a new line item (e.g. “Convertible Note Investor A”).

Step 6: Layer in ESOP and new money

Australian term sheets differ on ESOP timing:

• ESOP top‑up pre‑money (before notes convert and before new money).
• ESOP top‑up post‑note, pre‑money (after note conversion but before new money).
• ESOP sized as a % of fully diluted post‑money.

DocketMath lets you:

• Choose when ESOP is sized relative to note conversion.
• Set a target ESOP percentage (e.g. 10–15% fully diluted).
• Automatically back‑solve the ESOP top‑up size.

Then:

1. Add ESOP top‑up shares (if any).
2. Add new investor shares: [ \text{New Shares} = \frac{\text{New Money}}{P_{\text{round}}} ]

Step 7: Final ownership percentages

Once all layers are added:

• Founders and existing holders keep their original share counts.
• Noteholders receive their calculated Note Shares.
• New investors receive New Shares.
• ESOP pool is set to your target.

DocketMath then computes:

[ \text{Ownership %} = \frac{\text{Holder Shares}}{\text{Total Shares Post‑Round}} ]

You can then run scenarios by tweaking:

• Pre‑money valuation
• ESOP target %
• Note

Common pitfalls

• confusing pre-money and post-money caps
• forgetting to apply the discount versus cap test
• ignoring existing option pool dilution
• mixing share class terms

When rules change, rerun the calculation with updated inputs and store the revision in the matter record.

Sources and references

Start with the primary authority for Australia and confirm the effective date before relying on any output. If the rule has been amended, update the inputs and rerun the calculation.

• Federal Register of Legislation

Capture the source for each input so another team member can verify the same result quickly.

Next steps

Use the Convertible Note Cap Table tool to produce a first pass, then share the output with the team for review. You can start directly in DocketMath: Open the calculator.

Capture the source for each input so another team member can verify the same result quickly.

Related reading

• Common deadlines mistakes in Australia

• How to calculate deadlines in Delaware

• Inputs you need for deadlines in Australia

• Why we started the DocketMath blog