How to use the convertible note conversion calculator
- Enter the note amount and, if the note earns interest, the interest rate and how many years it has been outstanding. Tick the box if the interest also converts into shares.
- Enter the discount the note gives on the price of the round. If the note has a valuation cap, enter it with the share count used for the cap price.
- Enter the price per share in the round.
- Read the shares issued, the conversion price and which term set it. The table compares the round price, the discounted price and the cap price. Use Copy, Print or CSV to keep it.
Formula
Interest = note amount x rate x years
Discounted price = round price x (1 - discount)
Cap price = valuation cap / shares counted for the cap
Conversion price = lowest of the round price, the discounted price and the cap price
Shares = (note amount + interest) / conversion price, rounded down
Interest is simple interest and is added to the amount that converts only if you tick the box. The remainder after whole shares is shown, and your note says whether it is paid in cash.
A 100,000 dollar note at a 20 percent discount
A $100,000 note with no interest and a 20% discount converts in a round priced at $1.00 per share. The discounted price is $1.00 x 0.80 = $0.80, so the note converts into 100,000 / 0.80 = 125,000 shares. The shares are worth $125,000 at the round price.
Now add 6% simple interest for 1.5 years, which is $9,000, and use a round price of $1.25. The amount that converts is $109,000 and the discounted price is $1.00, so the note converts into 109,000 shares. A cap changes the result when it gives a lower price: a $3,000,000 cap on 5,000,000 shares is $0.60 per share, so a $270,000 amount would convert into 450,000 shares.
How a convertible note works
A convertible note is a loan that turns into shares later, usually at a priced funding round. The early investor takes a risk on a young company, so the note often rewards them with a discount on the round price, a valuation cap that fixes a ceiling on the price, or both. The investor gets the lower of those prices.
The discount works on the round price in front of you. The cap works from a company valuation, divided by a count of shares to get a price. How that count is defined varies between notes, so the tool asks you for it rather than guessing.
Checking your own note
Every note is written differently. Interest can be simple or compound, can convert or be paid in cash, and may convert at a different price in a sale of the company. The definition of the shares counted for the cap, whether option pools are included, and how fractions of a share are handled all differ. This tool follows one common pattern so you can check the arithmetic.
Use it to cross check a spreadsheet or a term summary, then have a lawyer read the note and the closing numbers. To see how new shares change ownership, use the equity dilution calculator, and for company value, the business valuation calculator.
Assumptions and limits
- Interest is simple, based on the years you enter, and converts only if you tick the box.
- The conversion price is the lowest of the round price, the discounted price and the cap price.
- Shares are rounded down to whole shares and the remainder is shown.
- Rates, discounts and prices are examples to replace with your note's terms. This is not legal or tax advice.
Frequently asked questions
How is the conversion price decided?
It is the lowest of the round price, the round price after the discount and the cap price. The tool names which one applied in the headline.
What is a valuation cap?
A ceiling on the valuation used to convert the note. Dividing the cap by a share count gives the cap price, and if that is below the round price, the note holder gets the better price.
Does interest convert into shares?
In many notes it does, but not all. Tick the box if yours does. If it does not, the interest is shown as accrued but left out of the shares.
Why does the tool ask for shares for the cap?
Notes define the capitalization that the cap is divided by in different ways. Enter the number your note uses so the cap price matches it.