Transparent method
The formula
Worked example
Example inputs
How to interpret the result
A convertible note's eventual ownership conversion depends on interest accrual, a valuation cap, a discount rate, and the maturity date all interacting together, so two notes that look similar on their headline terms can convert into meaningfully different ownership stakes once the actual accrued balance and applicable cap or discount are worked through.
Before you rely on it
What to check
Confirm the exact accrued balance at conversion, including interest, and which of the cap or discount actually applies at that specific valuation, since the more favorable one to the investor typically governs.
The common error
Where people go wrong with convertible note calculator
Estimating conversion ownership from the note's face value alone, ignoring accrued interest. The actual converting balance is higher than the original investment once interest accrues, and that difference changes the resulting ownership stake.
Sensitivity evidence
How note principal changes the estimated conversion ownership
| Note principal | Estimated conversion ownership | Accrued note amount |
|---|---|---|
| $400,000 | 5.3% | $448,000 |
| $450,000 | 5.9% | $504,000 |
| $500,000worked example | 6.5% | $560,000 |
| $550,000 | 7.1% | $616,000 |
| $600,000 | 7.7% | $672,000 |
Every input, tested
Which input moves the estimated conversion ownership most
| Input | Tested from | To | Estimated conversion ownership at each end | Swing |
|---|---|---|---|---|
| Note principal | $450,000 | $550,000 | 5.9% to 7.1% | 1.2% (19%) |
| Valuation cap | $7,200,000 | $8,800,000 | 7.2% to 6.0% | 1.2% (19%) |
| Years outstanding | 1.0 years | 3.0 years | 6.2% to 6.9% | 0.655% (10%) |
| Simple annual interest rate | 5.0% | 7.0% | 6.4% to 6.7% | 0.218% (3.3%) |
| Priced-round pre-money valuation | $10,800,000 | $13,200,000 | 6.5% to 6.5% | none |
| Conversion discount | 18.0% | 22.0% | 6.5% to 6.5% | none |
Two variables at once
Estimated conversion ownership by note principal and simple annual interest rate
| Note principal \ Simple annual interest rate | 4.0% | 6.0% | 8.0% |
|---|---|---|---|
| $400,000 | 5.1% | 5.3% | 5.5% |
| $450,000 | 5.7% | 5.9% | 6.1% |
| $500,000 | 6.3% | 6.5% | 6.8% |
| $550,000 | 6.9% | 7.1% | 7.4% |
| $600,000 | 7.5% | 7.7% | 8.0% |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Note principal | $500,000 |
| Simple annual interest rate | 6.0% |
| Years outstanding | 2.0 years |
| Valuation cap | $8,000,000 |
| Priced-round pre-money valuation | $12,000,000 |
| Conversion discount | 20.0% |
| Estimated conversion ownership | 6.5% |
| Accrued note amount | $560,000 |
Where the inputs come from
Note principal is the amount invested, simple annual interest rate is the interest accruing on the note, and years outstanding is the time until conversion. The valuation cap and conversion discount work as in a SAFE, and the priced-round pre-money valuation is the value in the qualifying financing. Accrued interest converts into shares along with the principal, so the amount converting is principal plus interest. The note's maturity date matters: at maturity the holder may demand repayment.
When the result stops applying
The model covers a conversion at a priced round only and assumes simple interest and a single note. Real notes have different conversion mechanics, such as whether the cap is pre-money or post-money. If the company is not financed before maturity, the note can come due, forcing an extension or repayment. Interest and discounts add dilution that is easy to underestimate.
What to compare it with
Compare with the SAFE conversion calculator, and see the round on the pre-money and post-money page. The startup dilution and option pool dilution calculators show the effect on founders. Ask a startup lawyer to review the note terms.
People also ask
Frequently asked questions
How is a convertible note different from a SAFE?
A note is debt with interest and a maturity date that usually converts to equity, while a SAFE is not debt, has no interest and no maturity date.
What happens at the note's maturity?
The holder can demand repayment, or the parties can extend it or convert on agreed terms. If the company cannot pay, this can force a difficult negotiation.
Does interest increase dilution?
Yes. Accrued interest converts into shares along with principal, so a longer time before the round increases the investor's stake.