Definition
A convertible note is debt that typically converts into equity at a future priced round. It often includes an interest rate, a maturity date, and cap/discount conversion terms.
Example
A $500k note at 6% interest converts at the better of an $8M cap or 20% discount in the next round.
How to use it
- Conversion amount may include accrued interest (terms vary).
- Conversion price may be set by valuation cap, discount, or round price (terms vary).
- Maturity terms can trigger repayment or conversion if no round happens.
Common mistakes
- Modeling interest incorrectly (simple vs compounding; check the note).
- Ignoring stacked convertibles and option pool changes when estimating dilution.
- Assuming conversion is automatic without reading maturity clauses.
Measured as
Measure Convertible Note with the same date, unit basis, and accounting or policy definitions used in the rest of your model.
Misused when
- Modeling interest incorrectly (simple vs compounding; check the note).
- Ignoring stacked convertibles and option pool changes when estimating dilution.
- Assuming conversion is automatic without reading maturity clauses.
Operator takeaway
- Conversion amount may include accrued interest (terms vary).
- Conversion price may be set by valuation cap, discount, or round price (terms vary).
- Maturity terms can trigger repayment or conversion if no round happens.
- Tie Convertible Note to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Quantify the impact with Convertible Note Conversion Calculator if you need to turn the definition into an operating assumption.
- Read Convertible note: interest, cap/discount, and conversion basics if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
Where to use this on MetricKit
Calculators
- Convertible Note Conversion Calculator: Estimate how a convertible note converts in a priced round with interest plus a valuation cap and/or discount (simplified).
Guides
- Convertible note: interest, cap/discount, and conversion basics: A practical guide to convertible notes: how interest accrues, how caps and discounts affect conversion price, and common modeling pitfalls.
- Fundraising & valuation hub: pre/post-money, SAFEs, notes, and liquidation prefs: A practical hub for startup fundraising and valuation basics: pre/post-money, pro rata, option pool shuffle, SAFE/note conversion, and liquidation preference outcomes.