Convertible Note & Cap Table Math Guide for California

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 California (via the /tools/convertible-note-cap-table calculator) helps you model how a convertible promissory note turns into equity and how that conversion changes a company’s cap table.

In practical terms, it calculates results such as:

• Conversion price (and/or the resulting economics) using a discount and/or a valuation cap
• Investor shares issued upon conversion (and, if you choose to model it that way, upon a qualified financing trigger)
• Post-money ownership percentages for the noteholder versus existing holders
• Fully diluted totals after conversion (depending on how you treat options/other dilutive securities in your inputs)

This is a math tool, not a legal opinion. You’ll still want to align the calculator inputs to the exact language in your note agreement, since different instruments use different formulas and definitions (for example: what counts as “Qualified Financing,” how SAFE-like instruments are treated, and whether certain fees are included in capitalization).

When to use it

Use DocketMath when you’re working through situations where conversion math drives downstream ownership outcomes. Common “trigger moments” include:

• You’re drafting or reviewing a convertible note term sheet and want to sanity-check the economics before signing
• You’re updating a cap table after a financing event where conversion is expected
• You’re reconciling multiple spreadsheet versions (especially when discount and cap interactions get confusing)
• You’re preparing investor communications that require a clear “how many shares” explanation

Conversion-math questions the calculator is designed to answer

Use the calculator when you need outputs like these:

• If we raise at $X post-money, how does the cap affect conversion?
• If we apply a Y% discount, do we still hit the cap, or does the cap control?
• What is the post-conversion ownership % of the noteholder?
• If conversion dilutes existing holders, what do the percentages look like on a fully diluted basis?

California timing context (general limitation, not a conversion rule)

If you’re thinking about enforcing rights or litigating a dispute related to the note (for example, a claim arising from an alleged breach), California’s general 2-year period is commonly anchored by CCP §335.1.

• General/default period is 2 years under the general summary provided.
• Clear limitation: this timing period is not a conversion deadline.

Source reference: CCP §335.1 (general 2-year period) and general summary described on AllLaw’s California law overview: https://www.alllaw.com/articles/nolo/personal-injury/laws-california.html

Step-by-step example

Below is a concrete example that mirrors a “calculator mindset” (inputs → outputs) so you can reproduce the logic in your own modeling.

Example setup (using typical convertible note terms)

Imagine a California startup has:

• Existing shares outstanding: 10,000,000
• Option pool (for fully diluted modeling): 1,000,000 (optional—enter it only if you want fully diluted treatment consistent with your note definition)
• Convertible note principal: $500,000
• Valuation cap: $8,000,000
• Discount: 20% (0.20)
• Next financing post-money valuation: $12,000,000
• Implied per-share baseline assumption: derive per-share price from the post-money valuation and current fully diluted shares

Step 1: Compute fully diluted shares basis

If you include the option pool in the fully diluted share count:

• Fully diluted shares = 10,000,000 + 1,000,000 = 11,000,000

If your instrument defines the conversion share price using a different dilution assumption, update this step to match your note’s definition.

Step 2: Derive the implied price per share from the post-money valuation

Implied per-share price = Post-money valuation / Fully diluted shares

• Price baseline = $12,000,000 / 11,000,000 = $1.090909… per share

Step 3: Apply discount to the baseline price

Discounted conversion price = baseline price × (1 − discount)

• Discounted price = $1.090909… × (1 − 0.20)
• Discounted price = $1.090909… × 0.80 = $0.872727…

Step 4: Compute cap-based conversion price

Cap-based price = cap valuation / Fully diluted shares

• Cap price = $8,000,000 / 11,000,000 = $0.727272…

Step 5: Choose the more favorable conversion price

Many note structures convert using the lower effective conversion price (which results in more shares for the investor). That is typically min(cap price, discount-applied price).

• Lower price = min($0.727272…, $0.872727…) = $0.727272…

Important: Confirm your exact contract language. Some instruments have different ordering or selection logic (for example, cap only, discount only when cap doesn’t apply, or a specific “apply discount then cap” approach).

Step 6: Convert principal to shares

Shares issued = principal / conversion price

• Shares = $500,000 / $0.727272…
• Shares = 687,500 (rounding depends on your note’s whole-share or fractional-share language)

Step 7: Update cap table ownership

New total shares (if you add conversion shares):

• New fully diluted shares = 11,000,000 + 687,500 = 11,687,500

Ownership:

• Noteholder ownership = 687,500 / 11,687,500 ≈ 5.88%
• Existing holders’ collective ownership = 11,000,000 / 11,687,500 ≈ 94.12%

What In DocketMath, this appears as you

When you enter these values into /tools/convertible-note-cap-table, you should expect outputs that align with:

• The cap controlling in this scenario (because it produces the lower effective conversion price)
• Shares issued equal to principal divided by the selected conversion price
• Post-conversion ownership percentages reflecting dilution

Common scenarios

Convertible notes typically follow a few recurring math patterns. Here’s how to interpret them in the context of DocketMath.

Scenario A: Discount controls instead of cap

Use this scenario when the next financing valuation is high enough that:

• the discounted implied price becomes lower than the cap-based price

Math intuition:

• Cap price = cap / fully diluted shares
• Discount price = baseline price × (1 − discount)
• If discount price < cap price → discount controls → investor gets more shares

Scenario B: Cap controls instead of discount

This matches the step-by-step example:

• the cap limits the effective valuation more than the discount does
• therefore the cap-based price is lower, producing more shares

Scenario C: No conversion at all (or conversion triggered later)

Some instruments require additional conditions such as:

• a Qualified Financing threshold
• a maturity date conversion election
• notice and/or timing mechanics

The cap table math still matters, but DocketMath is most accurate when you run it for the actual event date when conversion occurs. If conversion hasn’t happened yet, treat “not converted” as a separate state/worksheet.

Scenario D: Multiple notes or multiple investors

If multiple notes convert:

• each note can have its own principal, cap, and discount
• dilution compounds as you add conversion shares

DocketMath can reduce spreadsheet drift if you keep:

• a consistent share basis
• a consistent dilution model
• a consistent assumption about when conversions occur

Scenario E: Rounding and share class effects

Even with the same underlying formula, outputs can diverge due to:

• rounding rules (whole shares vs fractional shares)
• whether fees/interest are included in principal
• whether the note converts into common stock (or another class)
• any special treatment in your cap table model (including preference-stack logic, if applicable)

Tips for accuracy

To get trustworthy outputs—and to be able to explain them—focus on input discipline and definition alignment.

1) Use the same share basis your note uses

Conversion price often depends on your fully diluted denominator, such as:

• whether you include the option pool
• whether you include other convertible instruments
• whether the note defines fully diluted differently than your spreadsheet

Checklist:

2) Verify how discount and cap are selected

Many notes choose the more favorable (often the lower effective conversion price). But “more favorable” can be implemented differently contract-to-contract.

Checklist:

3) Keep valuations consistent

Remember:

• Cap is a valuation limit (caps the effective valuation used to compute share price)
• Discount adjusts

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 New Hampshire — Full how-to guide with jurisdiction-specific rules