Designing Cap Table Conversion Mechanics for Stepping Down Founders
Founder step-down mechanics force super-voting share reclassification and unvested equity forfeiture to separate governance control from passive ownership.
promissory note redemption
Meaning
The repayment or settlement of a debt instrument issued by a start-up, typically converted into equity or paid in cash upon a qualifying event. The process of promissory note redemption occurs when a seed-stage loan reaches its maturity date or when a subsequent financing round triggers automatic conversion. This mechanism ensures that early lenders are either compensated with cash or receive shares at a predetermined discount rate.
It marks the transition of the security from a debt obligation to a permanent equity holding.
Settlement Mechanism
Debt documents specify the exact terms under which the redemption occurs, including interest accrual and conversion ratios. The promissory note redemption can take the form of a cash payout if the company has sufficient reserves or if the noteholder demands repayment. More frequently, the debt is exchanged for preferred stock during a venture round.
Financial Cost
Redeeming notes in cash reduces the liquid reserves of the start-up, potentially limiting operational runway. If the firm must repay the debt rather than convert it, it faces immediate cash constraints that can hinder growth. It requires careful cash-flow forecasting to avoid technical default.
Capital Dilution
Converting debt into equity increases the overall share count, diluting the ownership of the original founders. This dilution is often intensified by discount rates or valuation caps included in the original promissory note. It represents the cost of early-stage non-dilutive capital once the redemption is triggered.