Convertible Deals and Cap Table Session with Gunderson Dettmer

Last week, Brian Patterson, Jared Grauer and Jonathan Gleason of Gunderson Dettmer led a mentoring session for our members in response to an engaging post about convertible notes on our Online Mentorship Platform. They covered basic terminology, as well as an in depth review of a convertible note cap table. Members gained valuable information and resources from the session and Q&A summed up here:

Convertible notes are not as simple as they seem.
As Brian put it, “They are characterized by simplicity on the front end but complexity and uncertainty on the back end – The paperwork for convertibles are generally simple but the way that they convert is often complex and unknown until the time of your equity raise”–a surprising truth that founders don’t always know.

Note investors won’t really know how much they own.
Note investors don’t exactly know what they own until you have a term sheet. Before investing, they should know that because notes are not equity or shares, you won’t be 100% sure of how the cap table will convert.

Convertible notes can cause friction in the process of a Series A close.
Convertible notes have to be factored in when you are negotiating your term sheet, and all note investors have to sign off on new financing documents–just a couple points discussed when Brian explained how convertible notes can affect the process of closing a fundraising round.

Seeing real numbers helps with the complexity.
Jared went through different scenarios on a provided convertible note cap table spreadsheet to help members understand the conversion calculations in different cases. For instance, Bill Guthrie of Patients with Power found that in one scenario, the size of the post-money option pool does not affect the percentage of ownership of the note holders or the new investors.

Don’t mix convertible notes and securities.
Convertible notes and securities have many key differences that were addressed in the presentation. Members were advised against mixing the two, as figuring out the numbers during conversion could end up being a nightmare.

Big thanks to Brian Patterson, Jared Grauer and Jonathan Gleason of Gunderson Dettmer for sharing their expertise with our members! Their trust and engagement in our community continue to help our members grow through our partnerships, and make for a better, stronger FN. You can RSVP for our next fnMentoring with Gunderson Dettmer on Dec. 11 and access the recording from this session on convertible deals here.

For the opportunity to access FN’s many benefits including an invitation to our next fnMentoring session, and access to past fnMentoring recordings, learn about our approval process here.