Understanding the Cap Table

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Two12 is an agreement between a buyer of a convertible note and the buyer of an underlying stock in a company. Under this agreement, if a company does not make payments on time, the buyer can sell his shares and receive a lump sum payment. If the company makes payments on time, the convertible note holder will receive a specified percentage of the capital stock as compensation.

A convertible note is usually secured by the underlying stock certificates of the company. The Cap Table is also referred to as the discount note. This gives the lender protection in the event that the borrower defaults because of financial difficulties. It is actually the last resort for the company. In order for a borrower to convert his convertible note, he must pay the required fees and interest on the debt. These costs are usually borne by the borrower.

The document itself outlines the terms and conditions for the conversion. For example, it will state the amount of the payment due the borrower, the date of maturity of the note, and the name of the buyer of the note. In most cases, the company will be the buyer. Once a buyer is decided, the document will specify the name of the person or business that will act as the company's agent in its place of business. Two12 of the person doing the business does not necessarily have to be the company's owner or an employee.

This process is actually done by the company itself. Once all necessary paperwork is in place, it will forward the documents to the lender. At this point, the company will no longer need the services of a broker or a securities broker. Instead, it will work directly with the buyer. However, the buyer still has the right to enter into an agreement with a registered broker who is also registered with the SEC. This person will serve as an intermediary between the lender and the buyer of the convertible note.

Since the cap table is used to simplify the conversion of notes from one type of financial instrument to another, it also simplifies the documentation associated with the transaction. There is just one set of documents that needs to be converted - the note holder's account information. All other elements such as the loan amount, the interest rate, the original principal balance, the remaining term (if any), the outstanding balance, and the cap table will be automatically converted into an easily readable format. This reduces the time required for the note holder to prepare his or her own financial statements.

The process can be completed quickly because the convertible note buyer will be responsible for providing all of the necessary information to the lender. In most cases, the buyer will be able to provide the necessary financial statements without even needing to meet with the lender. The only thing the lender will be required to do is receive the signed agreement between the buyer and the seller.

When a company buys a convertible note, it typically pays the seller a cap price, which is a pre-determined amount agreed upon in the sale transaction. This cap price is usually based on the note holder's performance. A company can purchase notes at various prices depending on the current market value of the company's stock and the company's creditworthiness. In most cases, the company's equity will dictate its cap price; however, the note holder's performance may play a role in the valuation.

Although a convertible note is similar to other transactions in that it is a sale and the parties involved are ultimately two companies, the cap table makes it different. For example, when a buyer pays a seller a cap in order to purchase a note, the cap amount is always based on the value of the company's stock at the date of the transaction. Also, the cap on the sale of a note is determined by the net proceeds from the sale. The value of the company's stock, along with the net proceeds will determine the cap on the sale. These differences between a conventional note and a convertible note make the cap table one of the most important parts of a note.