Convertible note interest and conversion.
A convertible note converts its principal plus accrued interest at the lower of the cap and the discounted round price. A $250,000 note at 6% for 18 months accrues $22,500, converts $272,500 at a $6 million cap, and ends with about 3.38% after a $3 million round at $10 million pre-money.
Noteholder stake after the round
3.4%
- Accrued interest
- $22,500
- Amount that converts
- $272,500
- Conversion valuation
- $6,000,000
- Note shares valued at the round price
- $454,167
Indicative result from the numbers you enter. Not financial, tax or legal advice.
How it is calculated.
- Accrued interest = principal x annual rate x months / 12.
- Converting amount = principal + accrued interest.
- Conversion valuation = the lower of the cap and the round pre-money x (1 - discount).
- Per existing share, the note gets converting amount / conversion valuation new shares and the round investors get new money / pre-money. Noteholder stake = note shares / (1 + note shares + round shares).
- Value at round price = converting amount x pre-money / conversion valuation.
Worked example.
$250K note, 6% for 18 months, $6M cap
| Step | Working |
|---|---|
| Accrued interest | $250,000 x 6% x 18 / 12 = $22,500 |
| Converting amount | $250,000 + $22,500 = $272,500 |
| Conversion valuation | Lower of $6,000,000 and $10,000,000 x 0.8 = $8,000,000, so $6,000,000 |
| Noteholder stake | 0.04542 / (1 + 0.04542 + 0.3) = 3.38% |
| Value at round price | $272,500 x 10 / 6 = $454,167 |
Typical note terms.
Startup notes usually carry simple interest in the low to mid single digits, a maturity of 18 to 24 months, a discount around 20% and often a valuation cap. Interest is rarely paid in cash; it converts into shares with the principal, which is why a note that runs longer takes a bigger stake.
How the pre-money is counted.
This calculator treats the round pre-money as the company before the note converts, so the note and the new money both dilute existing holders. Some term sheets instead count the note shares inside the pre-money, which moves that dilution onto the founders alone and lowers the new price per share. The difference can be a point or more of ownership, so ask counsel which method your documents use.
Maturity and what happens next.
If no priced round happens before maturity, the note is technically due. In practice holders often extend it or convert at the cap, but they now hold the stronger hand. Track the maturity date alongside your runway.
Common mistakes.
- Leaving accrued interest out of the converting amount.
- Using compound interest when the note says simple interest.
- Missing the maturity date and negotiating an extension from a weak position.
- Assuming the note converts at the round price instead of the cap or discount price.