How to calculate preferred returns in Carta LLC
Carta calculates preferred return based on Unreturned Invested Capital. This leverages the full time series of transactions that impact unreturned invested capital to provide more accurate interest calculations across full and partial accrual periods.
At the entity level, you can select between a simple iterative calculation method or compound interest formula for calculating preferred return. The simple iterative calculation uses the simple interest formula at each year and adds that simple interest to principal, populating cashflows across a timeline.
The compound interest formula is a simplified approach that uses a single formula, mimicking what you may do in Excel – p * (1 + r / n) ^ (n * t). The default is the simple iterative calculation. If you would like to instead use the compound interest formula, please contact Carta Help.
For an interest to accrue preferred return, it must have these accrual terms configured:
Accrual start date
Accrual rate: The annual rate at which preferred return accrues on top of invested capital. Always use the nominal annualized rate, even if the compounding or accrual periods are not yearly.
Accrual period: The time period over which preferred return accrues on top of invested capital
Compounding period: The time period over which preferred return accrual compounds on top of the invested capital amount. Set to “Simple (not compounding)” to use preferred return accrual without compounding.
Day count convention: The method used to counting days when calculating preferred return accrual
Input | Description |
Interest Holder | The individual or organization entitled to an interest |
Quantity | The total number of units represented by this interest |
Issue Date | The date on which the interest was issued to the holder |
Documents | Legal documents specifying the terms for each interest |
Only for interest types with original issue price tracking
Original Issue Price | The original price per unit, at time of issuance |
Only for capital interest types
Invested Capital | The total amount of capital invested in association with this interest. This is also the principal for calculating any preferred return. |
Liquidation Multiplier | The multiple applicable at liquidation time for this interest. Allow investors to receive a “multiple” of their liquidation preference before choosing to convert their preferred shares into common shares. |
Participation Cap Type | The type of cap on the holder’s participation in “remaining proceeds” |
Participation Cap Multiple | The multiple (usually of their liquidation preference) used to determine the holder’s participation cap |
Conversion Type | The method used when converting the interest to common |
Conversion Multiple | The capital interest conversion multiple |
Only for capital interest types with a preferred return
Compounding Period | The time period over which preferred return accrual compounds on top of the invested capital amount. Set to “Simple (not compounding)” to use preferred return accrual without compounding. |
Accrual Period | The time period over which preferred return accrues on top of invested capital |
Accrual Rate | The annual rate at which preferred return accrues on top of invested capital. Always use the annualized rate, even if the compounding or accrual periods are not yearly. |
Day Count Convention | The method used to counting days when calculating preferred return accrual |
Only for interests types with vesting
Vesting Plan Template | A standard template used to generate the vesting plan for this interest * This column is only available for interest types which use vesting |
Vesting Plan Start Date | The start date for any time based vesting conditions on a vesting plan * This column is only available for interest types which use vesting |
Only for interest types with appreciation rights
Threshold Type and Value | Also known as Hurdle Rate. Either Overall or Per Unit, the value above which the holder is entitled to gains in the value of the business |
Only for interest types which are exercisable
Strike Price | The interest’s strike price |
Only for interests issued to a new holder
Tax ID Type and Tax ID | The type and ID number of the new interest holder |
Group | Optional, the group to which the new interest holder belongs |
Employee ID | Optional, the interest holder’s employee ID |
Address, City, State or Province, ZIP code and country | The interest holder’s contact address |