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).