How a convertible note converts
A convertible note is a loan that converts into shares at a later financing instead of being repaid in cash. The amount that converts is the principal plus the interest accrued to the round, and the shares issued are that amount divided by the conversion price. The discount price is the round price less the discount. The cap price is what the share price would be if the company were valued at the valuation cap. The noteholder gets the lower of the two, because it gives more shares.
A SAFE (simple agreement for future equity) works like a note without interest or a maturity date. Y Combinator describes a post-money SAFE as one where the ownership sold equals the investment divided by the valuation cap. This calculator takes the cap price of a post-money SAFE as the cap less the amount, per share in issue, and converts at the better of that and the discount price.
Worked example: a $250,000 note converting in a $2 million round
A $250,000 note carries 6% simple interest and converts after 15 months, so $18,750.00 of interest has built up and $268,750.00 converts. The note has a 20% discount and a $5,000,000 cap. The company has 1,000,000 shares and the round values it at $8,000,000 before $2,000,000 of new money, with the converting shares counted in the pre-money valuation.
The cap price is $5.00 a share, below the discounted round price, so the noteholder is issued 53,750.00 shares. The round price is $7.59. After the round the noteholder owns 4.08%, new investors own 20.00% and existing holders own 75.92%. Before the new money the noteholder would hold 5.10%. The round values the company at $10,000,000.00 after the investment.
Check published examples
Equidam's convertible note calculator uses a $400,000 note with a 20% discount, a $10 million cap and no interest, converting in a $1.5 million round at a $6 million pre-money valuation. The note converts at a 20% discount, so the noteholder holds 8.33% before the new money. After the round the noteholder has 6.67%, new investors 20.00% and the founders 73.33%. This calculator gives the same figures with the converting shares counted in the pre-money valuation.
Eqvista's worked examples price the round on the existing shares only, so choose existing shares only (excluded) to match them. With 1,000,000 shares, $40,000 converting under a $3 million cap at a $6 million valuation gives a $3.00 conversion price and 13,333.33 shares. $50,000 with a 20% discount and no cap gives 6,250.00 shares at $8.00. $60,000 under a $6 million cap at a $12 million valuation gives 10,000.00 shares at $6.00. And $10,000 at 10% interest for a year converts $11,000.00 into 2,200.00 shares at $5.00.
Post-money SAFE
Choose post-money SAFE to remove interest. On a $500,000 SAFE with a $6,700,000 post-money cap in a round valued at $20,000,000, the SAFE holds 7.46% before the new money, which is the investment divided by the cap and matches the 7.5% that Y Combinator gives for $500,000 on a $6.7 million cap. The conversion price is $6.20 a share and, after $5,000,000 of new money, the SAFE holds 5.97%.
A $1,000,000 SAFE with a 20% discount and no cap converts at the discount price. At a $12,000,000 pre-money valuation with $3,000,000 raised, that price is $8.60 and the holder owns 8.33% after the round. The Y Combinator page does not set out the full conversion formula, so this is the standard better-of-cap-and-discount reading, not a substitute for the SAFE you were given.
Compound interest and a binding cap
Interest is usually simple, but some notes compound. A note at 8% compounded yearly for 36 months converts $314,928.00, which includes $64,928.00 of interest. With a $3,000,000 cap and a $9,000,000 pre-money valuation, the $3.00 cap price applies, the effective discount is 63.17% and the noteholder owns 7.77% after the round.
What this estimate leaves out
This is a planning estimate for one note or SAFE converting in one round. It does not model several notes or SAFEs converting together, an option pool increase in the round, most-favoured-nation clauses, a maturity date that arrives before a round, repayment instead of conversion, or shares rounded down to whole numbers. How the cap price and capitalization are defined varies by document, so the note or SAFE itself decides. Get legal and tax advice before signing.
To compare with an ordinary term loan, use the business loan calculator.
For short-term borrowing, use the working capital loan calculator.
Use the right country page
This page stays in US dollars and uses US terms: convertible note, SAFE and priced round. The country choices above the inputs open separate local pages. Choosing United Kingdom opens the convertible loan calculator, which uses pounds and convertible loan notes. The inputs reset and amounts are not converted.
Inputs for the convertible note calculator
Instrument
A convertible note with interest, or a post-money SAFE with none.
Pre-money valuation counts
Whether the converting shares sit inside the round's pre-money valuation or come on top of it.
Interest
Simple interest, or interest compounded yearly. Ignored for a SAFE.
Amount invested and interest rate
The money put into the note or SAFE and the yearly rate. Enter zero for no interest.
Months until the round
How long the note is outstanding before it converts. Interest builds up for this time.
Discount and valuation cap
The discount to the round price and the highest valuation at which it converts. Enter zero for none.
Pre-money valuation and new money
The valuation agreed for the round before the new money, and the cash new investors put in.
Shares in issue before the round
Every share and option counted in the capitalization before the note converts.
CALCULATOR QUESTIONS
US convertible note calculator questions
How do you calculate the shares a convertible note converts into?
Divide the principal plus accrued interest by the conversion price. $268,750.00 converting at a $5.00 cap price gives 53,750.00 shares.
Does the discount or the valuation cap apply?
The one that gives the lower conversion price. In the worked example the $5.00 cap price beats the discounted round price, so the cap applies.
How much of the company does a SAFE own?
On a post-money SAFE the ownership sold is the investment divided by the cap. $500,000 on a $6,700,000 cap is 7.46% before the new money.
Should the pre-money valuation include the converting shares?
It depends on the term sheet. Included means only existing holders are diluted by the conversion. Excluded prices the round on existing shares alone. Choose the one that matches your round.
Does interest convert into shares?
It does where the note adds accrued interest to the amount that converts. $10,000 at 10% for a year converts $11,000.00 into 2,200.00 shares at $5.00.
What happens if I change country?
The United Kingdom option opens the separate convertible loan calculator, in pounds. Your inputs are reset rather than converted.