> .. buying part of Richard's company for 1 million bucks. He's valuing it at 5 million, so that's 20% of the company. No. The purpose of convertible note is a

> .. buying part of Richard's company for 1 million bucks. He's valuing it at 5 million, so that's 20% of the company. No. The purpose of convertible note is avoid that kind of valuation in % of the company. It is very difficult to arrive at a share % valuation of early stage startups and convertible note solves this problem. Its like a loan given to the company which is converted to equity during Series A round when the company is more mature and its easy to arrive at a valuation > (Peter)... who agrees to put in $1 million as a note with a $5 million cap and a 20% discount. In the original article BTV does a 40 Million pre money valuation. Lets assume the share price is 10$. - Peter gets 20% discount : so for him the shares at at 8$ per share - his valuation cap is $5 million: so for him the share price is ( $8 per share / ( 40M/5M ) ) = $1 per share - He gets (1M / 1) = 1M shares for company (In comparison, the series A round investor (BTV) invested $10 Million. So they also get 1 Million shares.) - Since the current valuation is $10 per share, his shares are worth (1M * 10) 10Million A 10x return for original investment of 1 Million. Looks extremely well ! > .. Plus, they want a senior liquidity preference of 1x to protect their downside Though on paper peter has 10x profit. But if the company gets into trouble and sells out for 10 million or below, peter get nothing since BTV takes off the first 10M