Cap table convertible note is very similar to cap and barrel convertible note, though note holders in those two types of note are usually not the same. In cap table note, a holder will sell part of his cap or barrel shares to the buyer and receive payments from that buyer based on the price the buyer paid for the cap or barrel shares at the time of sale. In barrel type, a holder will receive payments from the buyer depending on the value of the barrel shares at the time of purchase. It is considered an unsecured loan.

Both types of note have the same structure and basic elements. Note holders are required to submit a registration statement along with their cap and barrel shares to the company that issued the note. The company holds the cap and barrel and the note is registered under the name of the holder.

One major difference between convertible note and barrel type is that in convertible note, there is no cap or barrel to be sold. The buyer decides on the value of the shares at the time of purchase and initiates the payment transactions. In this case, the holder sells his stake in the company at the time of conversion.

In cap note, the holder must hold his ownership interest in the company until the note is converted into cash. After that, he becomes entitled to receive payments from the company based on its value at the time of conversion. The note document will detail the name and current value of the company’s equity at that point in time. The note will also describe the holder’s rights and responsibilities in the event the company ceases operation or liquidates. If the holder does not convert his holding into cash, he is still entitled to receive his payments.

Some holders are so motivated by the proceeds they could see fit to terminate their holding of the note and allow others to receive the proceeds. In cap type, the cap holders usually face a retention fee. This is typically one percent of the overall value of the note. The purpose of the cap note retention fee is to discourage the holder from doing something which may negatively affect the value of the note.

Another reason for the valuation is to protect the interests of all holders in the note. When convertible notes are made into equity securities, all holders receive priority on dividends. There are usually a set number of holders who have priority. For convertible notes held by one group of holders, all that need to do is buy the note from the issuer at the current market price, pay the required fee, sign the note and give the trustee information about the sale.

After the value of the note is reached at the purchase price, the holder has no obligation to sell the note if the company is insolvent. However, if the company is still operating and pays the necessary obligations, the holder can decide to exercise his option to convert the note into equity. He can then decide to sell the note or he can wait until it becomes more marketable and he can decide to exercise his option to convert the note. The option is called the cap table option.

startups allows holders of convertible notes to determine if they want to sell their notes before they become worthless. If the company cannot pay the holder the accrued dividends, he has the option to give the trust deed to the company and pay the holders for their shares of the company stock. If the company is solvent, then the holders have the option to sell their shares and convert their notes into cash.