Convertible Note & Cap Table Math Guide for Washington

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 Washington (tool name: convertible-note-cap-table) helps you model how a convertible promissory note converts into equity and how that conversion updates your cap table.

In practical terms, it translates these term-sheet mechanics into ownership math you can use immediately:

• Conversion price using either:

  • Discount to a priced round, and/or
  • Valuation cap (whichever is more favorable to the noteholder, depending on your note’s language).
• How many shares the note converts into based on:

  • The note’s principal, plus any accrued interest and/or deferred interest rules you specify.
• Post-conversion ownership:

  • Founder/common holders diluted by the new shares
  • Noteholder ownership inserted into the cap table with the correct percentage

Because the tool is built to be practical, it also helps you sanity-check whether results “look right” for common Washington startup scenarios—like multiple notes converting in the same financing or using an interest-bearing note.

When to use it

Use DocketMath when you need to convert note terms into cap table outcomes and you want repeatable numbers rather than spreadsheets that are hard to audit.

Common triggers include:

• You’re planning the first priced equity round and need to estimate dilution before issuing a term sheet.
• You have multiple convertible notes with different caps/discounts and want to compare outcomes side-by-side.
• You’re reconciling actual documents to a model (e.g., confirm that the conversion price logic matches what your note says).
• You’re preparing investor updates and want to show a clear “pre-money vs. post-money” ownership picture from the same assumptions.

Also consider document-time constraints. In Washington, the default statute of limitations for certain criminal offenses is 5 years under RCW 9A.04.080, with specific shorter exceptions for certain circumstances (including exceptions noted as RCW 9A.04.080(1)(j) for 3 years, plus other listed exceptions). While that statute doesn’t govern private contract interpretation in the way people often assume, it can matter when you’re dealing with timelines that involve disputes, claims, or enforcement actions.

Step-by-step example

Below is a worked example showing the flow of inputs → conversion price → converted shares → updated cap table.

Example scenario (single priced round)

Assume:

• Convertible note

  • Principal: $500,000
  • Interest: 8% per year, accrued 12 months
  • Total amount to convert (principal + accrued interest):

    • Interest = 500,000 × 0.08 × 1 = $40,000
    • Amount to convert = $540,000
  • Valuation cap: $6,000,000
  • Discount: 20%
• Priced equity round

  • Pre-money valuation: $8,000,000
  • Post-money valuation (pre-money + new capital): assume later step determines share price
  • New investor raise: $2,000,000
  • Price per share (based on round terms): $2.00/share
• **Cap table (before conversion)

  • Founder A: 4,000,000 shares
  • Founder B: 3,000,000 shares
  • Total current outstanding: 7,000,000 shares
  • Option pool: 1,000,000 shares (assume reserved, not issued; you can choose whether the tool treats it as included in fully diluted—match your documents)

Step 1: Compute conversion price from cap vs. discount

In many standard convertible note structures, the conversion price is the lower of:

• Cap-based conversion price, and
• Discount-based conversion price

To connect valuations to share price, you need the share price implied by the note conversion logic. For modeling, DocketMath uses your priced round price and the cap/discount mechanism you specify.

A common approach to express the cap effect is to compute an effective “cap valuation” share entitlement against the same priced round economics. With a provided price per share ($2.00), the tool will compute the effective conversion price accordingly.

Let’s show the discount path plainly:

• Discount-based conversion price = 2.00 × (1 − 0.20) = $1.60/share

Cap path (modeled as “if the company is valued at the cap, what share price would that imply?”). With a cap of $6,000,000 versus the priced round pre-money of $8,000,000, the cap makes conversion cheaper by a factor of 8,000,000 / 6,000,000.

• Cap-based conversion price ≈ 2.00 × (6,000,000 / 8,000,000)
  = 2.00 × 0.75
  = $1.50/share

So the noteholder gets the lower price:

• Conversion price = $1.50/share

Step 2: Convert the note amount to shares

• Amount to convert = $540,000
• Shares issued on conversion = 540,000 / 1.50 = 360,000 shares

Step 3: Update the cap table totals

Before conversion:

• Shares outstanding: 7,000,000

After conversion:

• New noteholder shares: 360,000
• New total shares: 7,360,000

Ownership percentages:

• Founder A: 4,000,000 / 7,360,000 ≈ 54.35%
• Founder B: 3,000,000 / 7,360,000 ≈ 40.76%
• Noteholder: 360,000 / 7,360,000 ≈ 4.89%

Step 4: Sanity-check against “looks reasonable” tests

Use quick checks to catch input errors:

• Lower conversion price → more shares
  If you accidentally used the higher of $1.50 and $1.60, your noteholder would be under-issued.
• Accrued interest matters
  If you set interest to 0% when your note accrues interest, your noteholder percentage will be understated.

You can also run alternative assumptions:

• Change discount from 20% → 15% to see how sensitive dilution is.
• Change the cap from $6,000,000 → $7,500,000 to test how cap tightness affects share issuance.

Common scenarios

Convertible notes rarely come in one flavor. DocketMath’s modeling supports common variants so you can run the numbers for your specific documents.

1) Notes with different caps and discounts converting together

If you have two notes converting in the same priced round, you typically want to model:

• Each note’s conversion price (cap/discount logic may differ)
• Each note’s converted share count
• The combined impact on total outstanding and the resulting percentages

Checklist for modeling multiple notes:

2) Interest-bearing vs. non-interest-bearing notes

Some notes convert only principal; others add accrued interest into the conversion amount.

What changes:

• Higher conversion amount → more shares at the same conversion price.
• Dilution increases proportionally with the added interest amount.

Model tip:

• If interest accrues between signing and conversion, ensure the tool’s accrual duration matches the event date in your financing paperwork.

3) Multiple valuation caps triggered by different events

Some convertible notes have mechanisms such as:

• conversion on a qualified financing
• conversion on a change of control
• conversion on maturity (often as either repayment or conversion)

Because the economics can shift by trigger, your math should align with the specific conversion event you’re modeling. DocketMath lets you run separate scenarios so you’re not mixing triggers.

4) Cap table base: “fully diluted” vs. “outstanding”

Cap tables often present:

• Outstanding shares (issued)
• Fully diluted shares (outstanding + option pool + reserved equity + convertibles)

Different modeling conventions produce different percentages.

To keep outcomes consistent:

• Choose one denominator approach for the exercise (e.g., include option pool or not).
• Apply the same approach every time you update the model.
• Match the convention used in investor materials.

5) Notes converting before or simultaneous with option pool refreshes

In some financings, the option pool is increased or granted around the same time as the priced round. Depending on document structure, the conversion math may treat new shares as dilutive either before or after pool creation.

Action step:

• Run two versions:

  • Pool created before conversion
  • Pool created after conversion
• Compare differences to see whether dilution is materially sensitive.

Tips for accuracy

Precision in cap table math usually comes from disciplined input handling. Here are the most common sources of mistakes and how to prevent them.

Conversion price logic

Sources and references

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

• Rev. Code Wash. § 19.150

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