Convertible Note & Cap Table Math Guide for Tennessee

What this calculator does

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

DocketMath’s Convertible Note & Cap Table Math calculator helps you model how a convertible note typically turns into equity and how that conversion flows into a cap table—including the effects of a valuation cap, a discount, and the number of shares issued.

In plain terms, the calculator computes outcomes you’ll use for negotiations, internal planning, and investor updates:

• Conversion price per share (based on cap and/or discount)
• Converted share count from a note principal amount
• Post-conversion ownership percentages for:

  • the note investors
  • existing shareholders (assuming you provide their share counts)
• Dilution math so you can see what changes after conversion

Typical inputs you’ll enter

While the UI may vary slightly, the core categories usually look like this:

• Note principal (USD)
• Valuation cap (USD) and/or discount rate (%)
• Pre-money valuation used for the conversion scenario (USD)
• Current capitalization:

  • existing shares outstanding
  • existing option pool or other share buckets (if applicable)
• Any conversions/issuances assumptions for the scenario you’re modeling

Typical outputs you’ll get

The calculator generally produces:

• Conversion price (or the effective price chosen by cap/discount logic)
• Shares issued to the note holders
• A post-money cap table snapshot with updated ownership percentages

Why this matters in Tennessee

In Tennessee, many founders and operators focus on business math while other timelines are governed by law. For example, Tennessee’s criminal procedure sets a one-year limitation period for certain actions (see Tenn. Code Ann. § 40-35-111(e)(2)), with related limitation guidance in Tenn. Code Ann. § 40-2-102(a).

That legal timing doesn’t directly govern convertible note conversion, but it’s a reminder: deadlines exist in multiple areas, so keep your investor reporting and corporate actions aligned with your deal documents and issuance dates.

When to use it

Use DocketMath’s calculator when you need to translate note terms into share outcomes with high clarity. Common “conversion math” moments include:

• You’re negotiating a new round and want to quantify dilution under:

  • valuation cap only
  • discount only
  • both cap and discount (whichever is more favorable, depending on your note’s clause)
• You’re preparing a “conversion outcome” memo for internal stakeholders
• You’re updating a cap table after new capital events
• You’re modeling multiple scenarios to understand best-case vs. worst-case dilution

Best times to run scenarios

Consider running at least these three scenarios when your note includes both cap and discount:

1. High-valuation scenario (cap likely dominates)
2. Low-valuation scenario (discount likely dominates)
3. Mid-valuation scenario (either may dominate depending on how your note calculates)

Tennessee-specific operational checkpoints

Although Tennessee statutes you’ll see in litigation contexts (e.g., Tenn. Code Ann. § 40-35-111(e)(2) and Tenn. Code Ann. § 40-2-102(a)) don’t set conversion mechanics, they can impact how quickly disputes must be addressed. If your company expects litigation risk (e.g., around notice, default, or misrepresentation), you may have to move faster than the business team expects.

Step-by-step example

Below is a practical walkthrough showing how you might model a convertible note conversion using DocketMath. (Numbers are hypothetical and meant to illustrate the math workflow.)

Example inputs (assume a conversion upon financing)

• Existing shares outstanding: 1,000,000
• Note principal: $500,000
• Valuation cap: $6,000,000
• Discount: 20%
• Pre-money valuation for the financing scenario: $10,000,000
• Post-financing issuance assumption: we’re focusing on conversion effects only (no additional new equity beyond the financing’s price anchor)

How the calculator typically derives conversion price

Most common convertible note structures pick the lower effective price produced by:

• the valuation cap formula, and
• the discount formula (applied to the applicable price/valuation in the financing).

To keep the example consistent, we’ll translate valuations into an effective per-share price using a simple capitalization baseline.

Step 1: Compute an implied per-share price from the financing valuation

Assume the implied investor price is based on the note’s “conversion” baseline. A simplified approach is:

• Implied company value: $10,000,000
• Existing fully diluted shares (for price anchor): 1,000,000
• Implied price per share (anchor): $10,000,000 / 1,000,000 = $10.00 per share

Step 2: Compute the cap-based implied conversion price

• Cap value: $6,000,000
• Cap-based price per share: $6,000,000 / 1,000,000 = $6.00 per share

Step 3: Compute the discount-based implied conversion price

• Discount: 20%
• Discounted price: $10.00 × (1 − 0.20) = $8.00 per share

Step 4: Select the conversion price per the note’s typical “more favorable” rule

Most notes convert at the lower price. Here:

• Cap price: $6.00
• Discount price: $8.00
• Chosen conversion price: $6.00

Step 5: Compute the number of shares issued to the note holder

• Note principal: $500,000
• Conversion price: $6.00
• Shares issued: $500,000 / $6.00 = 83,333.33 shares

Most systems round shares (the calculator will apply whatever rounding you configure or default rounding it uses).

Assume rounding to 83,334 shares.

Step 6: Update the cap table and ownership percentages

• Existing shareholders: 1,000,000 shares
• Note conversion: 83,334 shares
• Total post-conversion shares: 1,083,334 shares

Ownership:

• Existing shareholders: 1,000,000 / 1,083,334 = 92.31%
• Note investor: 83,334 / 1,083,334 = 7.69%

What you’d see as outputs in DocketMath

When you submit your values, DocketMath should help you confirm:

• Conversion price chosen ($6.00 in this example)
• Shares issued (83,334)
• Post-conversion percentages (approximately 92.31% / 7.69%)

Common scenarios

Convertible notes show up in many recurring patterns. Here are scenarios where the same tool becomes especially useful—and how the outputs will shift based on the inputs you provide.

1) Cap-only note (discount = 0%)

If discount is not present (or set to 0%), the calculator will effectively compute:

• conversion price from valuation cap
• shares issued and dilution from that price

What changes in outputs

• The conversion price will be driven only by cap valuation math.
• Post-conversion ownership for the note holder will be stable relative to discount changes, since none exist.

2) Discount-only note (cap = 0 or not used)

If there’s no cap, then:

• conversion price becomes discounted financing price
• cap-based price won’t factor

Output effects

• Lower financing valuations can dramatically change the per-share anchor.
• The note investor’s ownership tends to increase when the discount anchors to a lower implied per-share price.

3) Both cap and discount present

This is the most commonly modeled case. DocketMath helps you compare:

• cap-derived conversion price
• discount-derived conversion price …and then apply whichever is more favorable under the note’s conversion rule.

Output effects

• If the financing valuation is high, the cap often yields the lower price.
• If the financing valuation is relatively low, the discount may yield the lower price.

4) Multiple shareholder buckets

If you track:

• common shares
• preferred shares (if converting or affecting totals)
• option pool/reserved pool

…then the “shares outstanding” number you feed into the calculator becomes a definition choice. Your outputs will reflect that choice.

Practical checklist

5) Sanity-checking dilution against expectations

Before you finalize a scenario for leadership, test it quickly with extreme inputs:

• Cap set very high (cap won’t bind)
• Discount set low (discount won’t bind)
• Both parameters set tight (both bind depending on rule)

You’re looking for directional correctness: the note investor should not end up with ownership that contradicts the incentives in the deal document.

Tips for accuracy

If you want DocketMath’s output to be trusted, focus on the parts that most often cause mismatch between assumptions and results:

Sources and references

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

• Tenn. Code Ann. § 47-14-103

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