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When converting a convertible note, it's crucial to understand various conversion methods to negotiate favorable terms. A convertible note is a short-term debt that converts into equity, allowing valuation deferral until the next equity round (typically seed or Series A financing). The conversion from debt to equity occurs based on predetermined calculations. There are three methods to calculate the conversion price per share: the pre-money method, percentage ownership method, and dollar invested method. Each method varies based on which variable is fixed, impacting the equity received by the investor. Understanding these methods is essential for both founders and investors.
