- Same concept as each other
- Warrants can be penny warrants or can have a warrant coverage of the current round in %
- Converts are preferred PIK instruments, with an investment amount, a convertible share price and number of shares, and ofc a PIK % rate
- You then get to pick the greater of either the PIK accrual or the converts converting at the exit equity share price
- The converts converting depend on the exit equity share price which depends on the total number of shares including the converts converting themselves (that’s the circularity), see below for more info
- Fix the number of shares (from warrants or converts)
1) The EqV created from the warrants or converts will depend on the
2) Share price (which you don’t know yet) multiplied by the number of warrant or convert shares
3) The exit equity value divided by
4) The total number of shares outstanding post adding the warrants or converts, the latter of which will depend on…
5) The number of shares from warrants or converts
You have to link the blue (the EqV created from warrants or converts) to the red (the share price after adding the warrants or converts) which is what creates the circularity.
In other words, the EqV from warrants or converts depends on the share price after already incorporating the warrants or converts shares (which depends on the EqV from the warrants or converts). That’s the circularity.