Convertible Note Calculator
Calculate conversion price, discount, and cap for convertible note financing rounds. Enter values for instant results with step-by-step formulas.
Formula
Effective Price = min(Valuation Cap / Shares Outstanding, Round Price x (1 - Discount Rate))
The convertible note converts at the lower of two prices: the cap-based price (valuation cap divided by shares outstanding) or the discount-based price (round price reduced by the discount percentage). The total amount converting includes both the original investment and any accrued interest.
Worked Examples
Example 1: Standard Convertible Note Conversion
Problem: An investor puts $500K into a convertible note with 5% interest, 18-month term, $5M cap, and 20% discount. The Series A is at $10M pre-money with 10M shares outstanding.
Solution: Accrued Interest: $500,000 x 5% x 1.5 years = $37,500\nTotal Convertible: $500,000 + $37,500 = $537,500\nPrice at Round: $10,000,000 / 10,000,000 = $1.00/share\nCap Price: $5,000,000 / 10,000,000 = $0.50/share\nDiscount Price: $1.00 x (1 - 0.20) = $0.80/share\nEffective Price: min($0.50, $0.80) = $0.50 (cap wins)\nShares: $537,500 / $0.50 = 1,075,000 shares
Result: Converts at $0.50/share (cap) | 1,075,000 shares | 50% effective discount | 2x implied return
Example 2: Discount-Driven Conversion
Problem: A $250K note with 4% interest, 12-month term, $8M cap, and 25% discount. Series A at $8M pre-money, 10M shares outstanding.
Solution: Accrued Interest: $250,000 x 4% x 1.0 year = $10,000\nTotal Convertible: $250,000 + $10,000 = $260,000\nPrice at Round: $8,000,000 / 10,000,000 = $0.80/share\nCap Price: $8,000,000 / 10,000,000 = $0.80/share\nDiscount Price: $0.80 x (1 - 0.25) = $0.60/share\nEffective Price: min($0.80, $0.60) = $0.60 (discount wins)\nShares: $260,000 / $0.60 = 433,333 shares
Result: Converts at $0.60/share (discount) | 433,333 shares | 25% effective discount | 1.33x implied return
Frequently Asked Questions
What is a valuation cap on a convertible note?
A valuation cap sets the maximum company valuation at which a convertible note will convert into equity, protecting early investors from excessive dilution if the company's valuation increases dramatically before the conversion event. For example, if an investor holds a note with a $5 million cap and the company raises a Series A at a $20 million pre-money valuation, the note converts as if the valuation were only $5 million, giving the investor four times as many shares as they would receive at the actual round price. The cap effectively sets a ceiling on the conversion price. Without a cap, early investors risk having their notes convert at a very high valuation that provides minimal ownership despite their early risk-taking.
How does the discount rate work on a convertible note?
The discount rate gives convertible note holders a percentage reduction on the price per share paid by investors in the qualifying financing round. A typical discount ranges from 15 to 25 percent, with 20 percent being the most common. For example, if Series A investors pay $1.00 per share and the note has a 20 percent discount, the note holder converts at $0.80 per share, receiving 25 percent more shares per dollar invested. The discount compensates early investors for the additional risk they took by investing before the company had achieved the milestones that justified the Series A valuation. When both a cap and discount exist, the note converts at whichever method gives the investor the lower price per share.
How does interest accrue on a convertible note?
Convertible notes accrue interest just like any loan, typically at rates between 2 and 8 percent annually, with 5 percent being common. However, the interest is usually not paid in cash but instead adds to the principal amount that converts into equity at the conversion event. For example, a $500,000 note at 5 percent annual interest held for 18 months would accrue $37,500 in interest, making the total convertible amount $537,500. This additional amount converts into shares at the same discounted price as the principal. While the interest rate on convertible notes is relatively low compared to other debt instruments, it provides additional shares to the investor as compensation for the time value of their money.
What triggers the conversion of a convertible note?
The most common conversion trigger is a qualified financing event, which is typically defined as the company raising a minimum amount of new equity capital, usually $1 million or more. When this trigger occurs, the note automatically converts into the same class of preferred stock being sold in the round. Other potential triggers include maturity, where the note reaches its expiration date (typically 12 to 24 months) and must either be repaid, extended, or converted. A change of control event, such as an acquisition, usually triggers conversion or repayment at a multiple (typically 1x to 2x the investment). Some notes also include optional conversion rights that allow the investor to choose when to convert.
What happens when a convertible note matures before a funding round?
When a convertible note reaches its maturity date without a qualifying financing event having occurred, several outcomes are possible depending on the note terms and negotiation. The most common resolution is extending the maturity date, giving the company more time to raise a priced round, often with improved terms for the investor such as a lower cap or higher discount. The note could also convert at the valuation cap into common stock or a new class of preferred stock. Technically, the investor could demand repayment of the principal plus accrued interest, but this rarely happens because forced repayment could bankrupt a cash-strapped startup, destroying the investor's potential upside. Most sophisticated note agreements have pre-negotiated maturity conversion terms.
What is the difference between a convertible note and a SAFE?
A SAFE (Simple Agreement for Future Equity) and a convertible note are both instruments for early-stage financing, but they differ in several important ways. A convertible note is debt with an interest rate, maturity date, and repayment obligation. A SAFE is not debt, has no interest rate, no maturity date, and no repayment requirement. SAFEs are simpler and cheaper to execute, typically requiring no legal negotiation beyond filling in the economic terms. Convertible notes give investors slightly more protection because they can theoretically demand repayment at maturity. SAFEs are more founder-friendly because they have no maturity pressure. SAFEs were introduced by Y Combinator in 2013 and have largely replaced convertible notes for very early-stage rounds.