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.

Written by MetricKit EditorialReviewed by MetricKit Editorial ReviewUpdated 2026-01-28
How MetricKit maintains this page

Review the methodology behind the formulas, see how content is reviewed, and use the contact page for questions, feedback, or corrections.

Best for

Founders and finance teams comparing note mechanics with SAFEs and priced-round outcomes.

Decision

How accrued interest, maturity, and cap-or-discount terms change note conversion economics.

Use it when

You need to model a note stack before a financing event or compare note terms with an alternative structure.

Reviewed by

MetricKit editorial review for startup fundraising mechanics.

Reviewed to keep conversion-price logic and accrued-interest treatment coherent with the SAFE and pre/post-money pages.

Try it in a calculator

What a convertible note is

A convertible note is debt that typically converts into equity at a future priced round. Unlike a SAFE, it generally has an interest rate and a maturity date (terms vary).

Interest and conversion amount

Conversion often applies to principal plus accrued interest (depending on the note). In simple modeling, accrued interest ~ principal * annual rate * (months / 12).

Conversion price mechanics

  • Cap sets an effective valuation for conversion (lower price per share if the round valuation is high).
  • Discount applies a percent off the round price per share.
  • Many notes convert at the better (lower price) of cap or discount (terms vary).

Maturity and repayment risk

  • Convertible notes have a maturity date; know what happens if no qualified financing occurs.
  • Some notes allow repayment, others extend or convert at maturity (terms vary).
  • Plan cash runway to avoid forced negotiations at maturity.

Modeling checklist

  • Use fully diluted shares for cap price calculations.
  • Include accrued interest in the conversion amount if the note says so.
  • Model both cap and discount and choose the lower conversion price.

Common mistakes

  • Using the wrong interest convention (simple vs compounding; check your documents).
  • Ignoring multiple convertibles and the option pool increase (dilution stacks).
  • Treating a simplified model as exact (reconcile to legal docs and cap table).

More in finance

Contribution margin: what it is and why it matters
CPC Formula: How to Calculate Cost Per Click + Example