Convertible Note Calculator

A convertible note is a short-term debt instrument that an early investor lends to a startup with the expectation that the loan will not be repaid in cash but will instead convert into equity at a later financing. The attraction for both sides is speed. Pricing a company at the earliest stage is difficult and expensive, because there is little revenue to value and the legal work for a priced round can be disproportionate to a modest cheque. A note lets the parties defer the valuation argument until a later investor sets a price, while still giving the early investor a reward for taking the risk first.

That reward is delivered through three terms that this calculator models: accrued interest, a valuation cap and a discount. Interest increases the amount that converts. The cap and the discount each lower the price at which the note converts, so the noteholder receives more shares per dollar than the new investors do. The calculator estimates the share count and the resulting ownership by comparing the conversion prices those terms produce. Because a note is a legal contract, every number it generates is only a simplified reading of a document the user should have reviewed with a lawyer, and this guide is educational and not legal advice.

Most startup notes carry a modest interest rate, frequently in the low single digits to the high single digits, accrued from the date the money is received until conversion or repayment. Interest is not usually paid in cash. It accrues and, in most notes, converts into shares along with the principal. The calculator therefore adds accrued interest to principal and divides the total by the conversion price. That treatment is conventional, but the note itself controls it, so check whether interest converts, whether it is forgiven on conversion, and whether the rate changes after maturity.

The calculator assumes simple interest, meaning interest accrues only on the original principal, calculated as principal times the annual rate times months outstanding divided by twelve. For a $300,000 note at 5% outstanding for 15 months, interest is 300,000 times 0.05 times 1.25, or $18,750, and the converting amount is $318,750. If the same note compounded annually, the converting amount would be about $318,865, a difference of roughly $115. At small rates and short terms, the distinction is minor, but at higher rates or longer maturities it grows, and some notes compound monthly or use a specific day-count convention such as 365 days.

Interest also has a tax and accounting dimension that varies by jurisdiction. Accrued interest may be treated as income to the holder before any cash is received, and some regimes impose minimum interest rules on loans. These are matters for an accountant. For modelling purposes the key point is that time is a cost: every extra month before a priced round increases the amount converting and therefore the dilution the founders absorb.

At conversion, three candidate prices exist. The round price is what new investors pay in the financing, calculated as the pre-money valuation divided by the relevant pre-money share count. The discount price is the round price multiplied by one minus the discount percentage, so a 15% discount gives 85% of the round price. The cap price is the valuation cap divided by the same share count, and it represents the price the noteholder would pay if the company were valued at the cap. The calculator computes all three and selects the lowest, which is the one that yields the most shares.

Why the lowest? The cap and the discount are separate protections that normally operate as alternatives, not as stacked benefits. The noteholder does not get a discount on top of the cap price. The usual drafting says the note converts at the lower of the discounted price and the cap price, though the detail should be confirmed in the document. The round price itself is shown as a ceiling because a note should never convert at a price higher than new investors pay.

It helps to translate each term into an effective discount. A $6 million cap in a round priced at $10 million is a 40% effective discount, because 6 divided by 10 is 0.60. A 15% discount is much weaker in that scenario. If the round is priced at only $6.5 million, the effective discount from the cap is under 8%, while the stated 15% discount is stronger. That reversal is the essential mechanic of notes.

There is a break-even round valuation at which the discount price equals the cap price. If the cap price is cap divided by shares, and the discount price is round pre-money divided by shares times one minus the discount, the shares cancel and the break-even pre-money becomes the cap divided by one minus the discount. With a $6 million cap and a 15% discount, that is 6 divided by 0.85, which is about $7.06 million. Below $7.06 million the discount produces the lower price; above it, the cap does.

This relationship gives founders a useful sanity check. Notes with a low cap relative to the expected next-round valuation will almost certainly convert at the cap, so the discount is irrelevant and the cap is the whole negotiation. Notes with a high cap or no cap will convert on the discount nearly every time. Founders should therefore ask what valuation they realistically expect at the next financing and compare that with the break-even point before agreeing to either term.

The calculator's default scenario uses a $500,000 note at 6% simple interest for 18 months, converting $545,000. A round valuation of $12 million over 10 million shares gives a round price of $1.20, a discount price of $0.96 with a 20% discount, and an $8 million cap gives $0.80. The break-even is 8 divided by 0.80, or $10 million, and the round is above it, so the cap wins. The noteholder receives 545,000 divided by 0.80, or 681,250 shares, which is about 6.4% of the 10,681,250 shares outstanding after conversion before new money.

Take a company with 10,000,000 shares outstanding on a fully diluted basis before the financing. An angel invested $300,000 through a note carrying 5% simple interest, a $6 million cap and a 15% discount. Fifteen months later, a lead investor proposes a $10 million pre-money Series A. Accrued interest is $18,750, so $318,750 converts. The round price is $10 million divided by 10,000,000 shares, or $1.00. The discount price is $0.85. The cap price is $6 million divided by 10,000,000, or $0.60.

The lowest price is the cap price of $0.60, so the noteholder receives 318,750 divided by 0.60, which is 531,250 shares. At the round price of $1.00 those shares are worth $531,250, or about 1.67 times the amount converted. If the cap did not exist and only the discount applied, the shares would number 318,750 divided by 0.85, or 375,000. The cap therefore delivers 156,250 more shares than the discount alone. Founders can see directly what that term costs them: every share is a share they no longer own.

Before any new money is considered, the noteholder holds 531,250 of 10,531,250 shares, which is about 5.04%. The calculator reports precisely this: estimated ownership of noteholders after conversion, before new-money shares are issued. It is an intermediate percentage, because a real round adds shares for new investors and may change the share count used to compute prices. The next sections show how much the final cap table depends on how those details are drafted.

Now suppose the market is weaker and the company raises at a $6.5 million pre-money valuation with the same 10,000,000 shares. The round price is $0.65. The discount price is 0.65 times 0.85, or $0.5525. The cap price is still $0.60, since the cap does not move with the round. This time the discount price is lower, so the discount governs. Shares issued are 318,750 divided by 0.5525, or about 576,923, compared with 531,250 in the stronger round.

The noteholder in this case receives more shares in a smaller round, but the shares are worth less. At $0.65 per share, 576,923 shares are worth about $375,000, a gain of roughly 17.6% over the $318,750 converted, which is exactly the benefit of a 15% discount. In the stronger round, the same investor's gain was 66.7%. This contrast explains why caps are the primary protection that early investors negotiate: they reward the investor most when the company has done well, which is also when the founders can most afford it.

For founders, the lesson is symmetrical. A cap that seems harmless at a conservative valuation can become expensive if the company grows faster than expected, because the noteholder's price remains fixed while the round price rises. Model at least three next-round valuations, including one well above your base case, before agreeing to a cap. Use the calculator by changing only the round valuation and watching which price becomes the lowest.

The shares a note converts into do not exist in isolation. They sit alongside the shares sold to the new investors, and both affect the final cap table. A financing document can treat the note shares in two broad ways. In one, the note shares are included in the pre-money capitalization used to set the round price, which means the new investors are protected from dilution by the notes and the existing shareholders absorb it. In the other, the round price is computed on the pre-conversion share count and the note shares are issued alongside, diluting everyone including the new investors.

Continue the $10 million pre-money example with $2.5 million of new money. If the price is set at $1.00 and the note shares are added afterwards, the investor receives 2,500,000 shares and the post-closing share count is 10,000,000 plus 531,250 plus 2,500,000, or 13,031,250. The new investor holds 19.2%, the noteholder 4.1% and existing holders 76.7%. The post-money valuation at $1.00 per share is about $13.0 million.

If instead the note shares are included in the pre-money, the price falls to $10 million divided by 10,531,250, or about $0.9496. The investor receives about 2,632,812 shares and the post-closing count is about 13,164,062. The new investor then holds exactly 20.0%, the noteholder 4.0% and existing holders 76.0%. Existing holders end with roughly 0.8 percentage points less than in the first case. The headline valuation was the same, but the definition of what sits inside it differs. This is the note equivalent of the option-pool shuffle, and the term sheet language deserves careful reading.

Startups often raise a series of notes over time, sometimes with different caps and discounts. Each note converts according to its own terms, so the total dilution is the sum of each noteholder's shares, and the earliest notes with the lowest caps usually carry the largest per-dollar advantage. Founders who raise a second note at a higher cap should model both conversions together instead of assuming each one is a small increment. A founder who issues three notes of $100,000, $200,000 and $300,000 at progressively higher caps will see a more complicated blend than a single note of $600,000.

Some notes include a most-favoured-nation clause, which allows the holder to adopt more favourable terms given to later investors. If you add a note with a lower cap or a bigger discount, earlier holders with such a clause may be entitled to match it. Also check how interest accrues in each note and whether all of them convert at the same time or only in a qualified financing that meets a specified size. Keep a table with principal, issue date, rate, cap, discount and maturity for every instrument, because the calculator, which handles one note at a time, is only as good as the data you enter.

When several instruments convert at once, shares from one can affect the price of another if the cap price is defined on a capitalization that includes the converting securities. This circularity is normally solved by a spreadsheet iteration or an algebraic formula. If your capitalization table has more than a couple of convertible instruments, use a full model and have counsel review it.

Because a note is debt, it has a maturity date, commonly twelve to twenty-four months after issue. If a qualified financing occurs before maturity, the note typically converts automatically. A qualified financing is usually defined by a minimum amount of new money, for example one million dollars of equity raised in a single transaction or series. If a smaller or non-qualifying financing occurs, the holder may have an option to convert, often at the lower of the cap price and the round price, or the note may remain outstanding.

If maturity arrives without a financing, the holder technically may demand repayment of principal and interest. In practice a startup rarely has the cash, and parties usually negotiate an extension, a conversion at a pre-agreed valuation or a restructuring. Founders should not assume extensions are automatic. The negotiating leverage shifts to the noteholder at maturity, and the company's other investors may be uncomfortable about a creditor who can demand money. Add the maturity date to your calendar and talk to the noteholder well in advance.

A sale of the company before conversion usually triggers a different payout, commonly a multiple of principal plus interest or conversion at the cap, depending on the contract. The calculator does not model maturity extensions, change-of-control payouts or conversion on a non-qualifying financing. If the scenario you care about falls in one of those categories, treat the result only as a starting point.

A simple agreement for future equity, or SAFE, was designed to be a lighter version of a note. It has no interest, no maturity date and no repayment obligation, and it converts into equity at a priced round or liquidity event using a cap, a discount or both. Because a SAFE is not debt, it avoids the pressure of a maturity date, and because it has no interest it does not grow over time. Many early-stage companies now prefer SAFEs in the United States for that reason, though notes remain common in other jurisdictions, in bridge financings and with investors that want a creditor claim.

The two instruments also differ in how the cap is measured. A post-money SAFE, the common modern form, defines the cap on a capitalization that includes all converting SAFEs, so each investor knows their ownership percentage regardless of how many other SAFEs are signed. A note cap is usually measured on the capitalization before the financing, so later notes dilute earlier holders alongside the founders. This calculator follows a simple pre-conversion share-count model, which suits notes, and a separate SAFE calculator is more appropriate for post-money SAFE mechanics.

Neither instrument is inherently better. Founders choose on the basis of cost, simplicity, investor expectations and legal environment. The decisive point for modelling is to match the tool to the document: model the instrument you actually signed, with its own definitions, not the one you wish you had.

The tool is a transparent first pass. It assumes simple interest, a single note, a round price based on a stated pre-money valuation and share count, conversion at the lowest of the three prices and no other converting instruments. It ignores option-pool increases created in the same round, pro rata rights, fractional-share rounding, maturity conversion, change-of-control payouts and tax. It also assumes the cap is applied to the same share count as the round price, which is not true in every document. If your note defines the cap price on a different capitalization, the result will differ.

Before signing or converting a note, confirm the following with your lawyer: whether interest is simple or compound and whether it converts; the exact conversion price formula; how the capitalization used for the cap is defined and whether it includes the option pool and other converting securities; the qualified financing threshold; the maturity date and extension mechanics; any MFN clause; the treatment on a company sale; and any investor rights attached to the shares received. Then run the calculator with at least three next-round valuations to see how the pricing terms interact.

Finally, treat every output as an estimate. Share counts, valuations and percentages change as the actual term sheet takes shape. The calculator is educational, not a substitute for legal, tax or investment advice, and it should be used to prepare better questions rather than to settle them.