As you get ready for your Series A, one of the most important tasks is managing your convertible notes. Handling convertible notes at Series A starts with reviewing, modelling and converting them before the round begins so the cap table stays clear and the investment process runs smoothly. Taking the time to review and model each note early helps you avoid delays and unexpected outcomes during your raise.
This guide explains the steps involved in handling convertible notes at Series A and offers practical insights to help you prepare for a smooth and well organised process.
New to Series A? Read our guide to raising Series A funding in the UK
What are convertible notes?
Convertible notes are debt instruments that allow investors to provide funding which converts into shares at a later stage, usually when the company raises a priced funding round such as Series A. Instead of setting a valuation early, the note defers that decision until your next round when there is more information about the business.
Most notes include a few key terms that influence how the conversion works:
- Discount which allows early investors to convert at a lower price than new investors
- Valuation cap which sets the maximum price at which their investment converts
- Interest which may accrue over time depending on the terms of the note and is often added to the amount converting into equity.
- Conversion trigger which is often the company’s next qualified financing round, usually defined by a minimum fundraising amount.
Convertible notes are popular in the early stages because they are simpler and faster to agree on than a full equity round. However, this simplicity means they need careful attention later to make sure the conversion process is clear and accurate.
Some UK startups also use Advance Subscription Agreements (ASAs), which operate similarly but are structured differently from traditional debt-based convertible notes.
Why convertible notes matter at Series A
A priced round is usually the point where your valuation is set formally, and this is what triggers the conversion of your notes into shares. When each note converts, it changes your ownership structure and affects the clarity of your cap table, which outlines your company’s ownership structure.
Investors will want a complete and accurate picture of your equity before they commit to the round. If your notes have not been reviewed early, you may face delays, repeated calculations or unexpected outcomes during due diligence. In some cases, unresolved notes can slow your raise or create avoidable confusion at a critical moment.
By understanding how your notes convert and preparing the numbers in advance, you can step into your Series A with confidence. This ensures your investment conversations stay focused on growth and opportunity rather than on correcting paperwork or resolving structural issues.
How to handle convertible notes at Series A
Once you understand why your notes become important at this stage, the next step is to make sure the conversion process is organised and accurate. Here is what we recommend to help you stay on track as you prepare for your raise:
1. Gather all note agreements and related documents
Bring every agreement into one place, including any amendments or side letters. This gives you a complete view of the terms you need to account for and reduces the chance of missing details that could affect the conversion.
2. Review the key terms for each note
Read through each agreement carefully to understand the discount, valuation cap, interest and conversion trigger. These terms determine how the note converts and the effect it will have on your ownership.
You should also check maturity dates and repayment provisions. Some notes become repayable if conversion does not occur within a specified timeframe, which can create unexpected pressure during fundraising.
3. Model how each note will convert
Calculate the conversion price and resulting share allocation for each note. This gives you a clear view of the impact on your cap table and highlights any notes that may need further attention before the round begins.
It is also important to understand whether conversion calculations are based on pre-money or post-money dilution assumptions, as this can materially affect founder and investor ownership percentages.
A simple example of how a convertible note converts at Series A
Imagine your Series A share price is set at £2. If a note includes a 20% discount, the investor converts at £1.60 per share. A £100,000 note would therefore convert into 62,500 shares.
If the note also has a valuation cap, the conversion price may be even lower. For instance, if the cap implies a conversion price of £1.20 per share, the investor would receive 83,333 shares instead of 62,500. In this case, the conversion uses the lower of the two prices because that is what the agreement provides for.
The exact calculation method depends on the wording of the note agreement and whether conversion is based on fully diluted share capital.
4. Speak with noteholders early
Share your plans and timeline so noteholders understand when and how their notes will convert. Early communication helps avoid confusion later and allows you to resolve questions before investors begin their review.
5. Confirm the numbers with your legal and financial advisers
Your advisers can ensure that the conversion calculations follow the terms of each agreement and support you in preparing accurate documents for due diligence. This step adds clarity and reduces the risk of errors during the raise.
6. Prepare a clean and accurate cap table
The final stage is keeping everything consistent and well organised as you move into your raise. Bring everything together in a fully updated cap table that reflects all conversions.
Many Series A investors will also expect to see fully diluted ownership models that reflect option pools, note conversions and post-round shareholdings.
Final thoughts
With the right guidance in place, you can enter your Series A with a smoother, more efficient process from the start, focusing on what matters the most. At Rise Accounting, we support founders by helping them:
- Review note agreements and understand how each term affects conversion
- Model the impact of discounts, caps and interest on ownership
- Keep the cap table accurate and up to date for investor review
- Align financial information so documents, calculations and assumptions all match
- Prepare clear and organised information for due diligence and investor conversations
If you would like support with any of this, reach out to us. We would be happy to help!
