Convertible Note Calculator

A convertible note is a loan that expects to be repaid in shares rather than cash. The investor lends now, the valuation argument is postponed, and the loan converts at the next priced round on terms fixed at the outset. On the default figures, 100,000 lent against a 5,000,000 cap and a 20% discount, converting at a round valued at 15,000,000: the discount path prices the conversion at 12,000,000, the cap prices it at 5,000,000, and the lower of the two binds. That is 2.00% of the company, worth 300,000 at the round valuation, 3.00x the money on paper. The same 100,000 handed over at the round price would have bought 0.67%.

The debt half the arithmetic does not see

IAS 32 treats a compound financial instrument such as a convertible bond as two things at once, splitting it into a liability component and an equity component, and that liability is what separates a note from a SAFE: it carries a rate and a repayment date. Interest accrues on the principal and converts along with it. A note carrying 5% simple interest for 18 months adds 7,500 to a 100,000 principal, so 107,500 converts rather than 100,000, and against the same 5,000,000 cap that is 2.15% instead of 2.00%. The calculator converts whatever figure sits in the investment field, so a note that has been outstanding for a while needs principal plus accrued interest entered there rather than the original cheque.

Which of the two terms binds

One threshold decides it: the cap divided by one minus the discount. On these figures that is 6,250,000. Above a round of that size the cap produces the lower conversion valuation and the discount is irrelevant to the headline percentage; below it the discounted round price is lower and the discount takes over. At a round of 5,000,000 the conversion valuation is 4,000,000 and ownership rises to 2.50%, driven entirely by the discount. The same mechanic applies to a SAFE, worked through at more length on the SAFE note calculator.

The percentage is measured before the new money

Y Combinator, whose standard documents defined the modern form of these instruments, states the rule plainly: the ownership sold equals the investment amount divided by the valuation cap. That holds exactly where the cap is a post-money cap. Where the cap is pre-money, the older of the two conventions, the slice is measured before the round's own shares exist, so the round dilutes it again: a 15,000,000 pre-money round raising 5,000,000 leaves everyone standing before it with three quarters of what they had, turning 2.00% into 1.50%. The calculator divides by the valuation entered and cannot tell which convention a given note follows.

What sits outside the model

Interest and maturity are not in it. Other notes converting in the same round are not in it, and they dilute each other as well as the founders. The option pool top-up usually agreed as part of a priced round is not in it either. Nor is the possibility that no priced round arrives at all, which is the risk the maturity date exists to price. And the multiple shown is a paper figure at the round valuation, not cash: it prices the stake at the headline number the newest investors paid, which is the highest price any share in the company has ever carried.