A convertible note is a loan that converts into equity when your startup raises its next priced round. The math behind it looks simple on paper — principal, a discount, a valuation cap, some interest — but the conversion price and the resulting ownership percentage are easy to get wrong, and they directly determine how much of your company you hand over. This convertible note calculator walks through every step: accrued interest, the discounted share price, the capped share price, the conversion price (which one wins), the shares issued, and the investor's post-money ownership.
Slide the inputs and every figure updates instantly. The result card shows which mechanism — the discount or the cap — actually controlled your deal, and by how much.
How to Use
- Enter the Note Amount — the principal the investor wires into your company today.
- Set the Valuation Cap. This is the maximum pre-money valuation at which the note converts; a lower cap favors the investor. Typical early-stage caps run from $3M to $15M.
- Choose the Discount Rate. The market standard is 20%, but 10% and 25% also appear. It is a discount off the next round's price per share, not a discount on the valuation.
- Add the Interest Rate. Most convertible notes carry a contractual interest rate (often 6–10% per year). The interest does not pay out in cash; it converts into additional shares along with principal.
- Set Years Until Conversion — how long between signing the note and the next priced round. Seed notes usually convert within 12–24 months.
- Enter the Next Round Pre-Money Valuation you expect to negotiate with the Series Seed or Series A lead.
- Enter Fully-Diluted Shares Before Conversion — total shares outstanding on a fully-diluted basis, including the option pool, just before the note converts.
The engine computes the next-round price per share, the discount-adjusted price, the cap-adjusted price, and then takes the lower of the two — because the noteholder always converts at whichever price is better for them.
The Conversion Formula
A convertible note converts at the lower of two possible prices:
Conversion Price = min( Valuation Cap ÷ Fully-Diluted Shares, Round Price × (1 − Discount) )
Where:
- Round Price = Next-Round Pre-Money Valuation ÷ Fully-Diluted Shares Before Conversion.
- Discount Price = Round Price × (1 − discount rate).
- Cap Price = Valuation Cap ÷ Fully-Diluted Shares Before Conversion.
The principal plus accrued interest then converts into shares:
Shares Issued = (Note Amount + Accrued Interest) ÷ Conversion Price
Ownership % = Shares Issued ÷ (Fully-Diluted Shares + Shares Issued) × 100
Accrued interest is simple interest, not compound: interest = principal × rate × years.
Worked example on a $250,000 note with a $5,000,000 cap, a 20% discount, an 8% interest rate, held for 1.5 years, converting on an $8,000,000 pre-money round with 10,000,000 fully-diluted shares:
- Accrued interest = 250,000 × 0.08 × 1.5 = $30,000, so principal plus interest is $280,000.
- Round price = 8,000,000 ÷ 10,000,000 = $0.80 per share.
- Discount price = 0.80 × 0.80 = $0.64 per share.
- Cap price = 5,000,000 ÷ 10,000,000 = $0.50 per share.
- Conversion price = min($0.64, $0.50) = $0.50 — the cap wins.
- Shares issued = 280,000 ÷ 0.50 = 560,000 shares.
- Ownership = 560,000 ÷ 10,560,000 = 5.30%.
Notice that even though the next round priced the company at $8M, the noteholder's effective price corresponds to a $5M valuation — that is the entire point of the cap.
Cap vs Discount: Which One Actually Matters?
They are not additive; they are the better-of-two prices.
- If your next round prices the company below the cap, the discount usually wins, because the round price is already low. A $5M cap on a $4M round means the cap is irrelevant — the discount price governs.
- If your next round prices well above the cap (say a $15M round against a $5M cap), the cap wins by a wide margin and the discount barely matters.
- The two mechanisms cross over at a valuation equal to
Cap ÷ (1 − Discount). On a $5M cap with a 20% discount, that crossover is $6.25M. Any round priced above $6.25M triggers the cap; below it, the discount governs.
This is why founders should negotiate the cap harder than the discount: the cap is the term that bites when your startup actually performs.
Examples
Example 1 — A standard seed note. An angel invests $250,000 on a $5,000,000 cap, 20% discount, 8% interest. Eighteen months later the company raises a priced round at $8,000,000 pre-money with 10,000,000 fully-diluted shares. As worked above, the note converts at $0.50 per share into 560,000 shares, and the angel ends up owning roughly 5.30% of the company.
Example 2 — The discount wins. A $500,000 note with a $10,000,000 cap and 20% discount converts on an $8,000,000 round. Round price is $0.80, discount price is $0.64, but the cap price is $1.00. Conversion happens at the discount price of $0.64, issuing 843,750 shares and giving the noteholder about 7.78% ownership. The cap never engages because the round priced below it.
Example 3 — A large institutional note. A lead investor puts in $2,000,000 on a $20,000,000 cap, 20% discount, 8% interest, held 1.5 years, converting on a $30,000,000 pre-money round with 20,000,000 fully-diluted shares. Accrued interest is $240,000, so $2,240,000 converts. The cap price is $1.00 versus a discount price of $1.20, so the cap governs: 2,240,000 shares, about 10.07% ownership.
FAQ
How is a convertible note conversion price calculated?
The conversion price is the lower of two values: the valuation cap divided by fully-diluted shares outstanding, and the next round's price per share discounted by the note's discount rate. The noteholder always receives whichever price is lower, because that maximizes the number of shares they receive.
What is a typical valuation cap for a seed note?
Most US seed-stage convertible notes carry caps between $3M and $15M, with $5M–$10M being the most common band. Pre-seed deals can cap as low as $2M, while a growth-stage bridge note may cap above $20M. The cap is the single most negotiated economic term on the note.
How does the discount rate interact with the valuation cap?
They do not stack. The note converts at whichever gives the lower price per share — the discounted round price or the capped price. A 20% discount on a $5M cap, for example, only governs below roughly a $6.25M round; above that valuation the cap takes over.
Does interest accrue on a convertible note?
Yes, almost always at a contractual simple interest rate (commonly 6–10% per year). The interest is not paid in cash; it accrues and then converts into additional shares alongside the principal at the conversion event. A $250,000 note at 8% held for 18 months generates $30,000 of extra shares.
What ownership percentage does a convertible note investor end up with?
It depends on the note size, the conversion price, and the fully-diluted share count. On the standard seed example above ($250K note, $5M cap, $8M round), the investor ends up around 5.3%. Larger notes, lower caps, or higher next-round valuations all push that percentage higher.
What happens if the note matures before a priced round?
Most convertible notes have a maturity date (often 18–24 months). If no qualifying financing has occurred by then, the note can either be extended, repaid as debt, or (more rarely) convert at a negotiated discount. This calculator models conversion at the next priced round, not maturity repayment.
Is a convertible note the same as a SAFE?
No. A SAFE (Simple Agreement for Future Equity, popularized by Y Combinator) is not a debt instrument — it has no interest rate and no maturity date. The discount and cap mechanics are nearly identical, but the interest accrual step in this calculator applies to true convertible notes, not to post-money SAFEs.
Disclaimer
This convertible note calculator is provided for informational purposes only and does not constitute legal, investment, tax, or accounting advice. Results are estimates based on the inputs you enter and the standard best-of discount/cap conversion formula; actual conversion terms depend on the note's negotiated clauses, side letters, most-favored-nation provisions, option pool size, and the specific lead investor's documents. Always confirm your cap table and ownership with a qualified startup attorney and your cap-table administrator before closing a round.