A convertible note is debt that converts into equity at a future priced round, at whichever is more favorable to the investor — a discount off the round price, or a fixed valuation cap.
How it works
The note’s principal plus accrued interest gives its accrued value. The discount price and cap price are both calculated, and the lower (more favorable to the investor) becomes the actual conversion price — dividing accrued value by that price gives shares issued.
What this does not include
This models a single note converting alone — in practice, multiple notes from different investors typically convert together in the same priced round, and the cap table math can get more complex with multiple notes at different terms.
How to use this calculator
- Enter note amount, interest rate, years outstanding, discount, valuation cap, next round price, and fully-diluted shares.
Frequently asked questions
Why do convertible notes have both a discount and a cap?
They protect the investor from two different scenarios — the discount rewards early risk-taking if the company’s valuation only grows modestly, while the cap protects against being diluted at an unfairly high valuation if the company grows very fast.
Does a convertible note pay cash interest?
Typically no — the accrued interest is usually added to the principal and converts into additional equity along with it, rather than being paid out in cash.
What happens if the company never raises a priced round?
Convertible notes typically have a maturity date; if no qualifying round happens by then, the note may convert at a default valuation, be repaid, or be renegotiated, depending on its specific terms.
