Note conversion math is how convertible instruments translate invested dollars into shares when a qualifying equity financing triggers conversion.

How it works

A note has $500K principal, 6% simple interest, $8M valuation cap, and 20% discount. Series A prices at $12M pre-money. Cap price implies ownership as if the company were worth $8M; discount price is 80% of Series A price per share. The noteholder converts at whichever yields more shares — usually the cap when the round valuation exceeds the cap.

Interest often adds to principal before division. Example: $530K converts at cap-implied price → share count = $530K / (cap-based price per share). Multiple notes convert simultaneously; pro-rata side letters may grant additional investment rights in the priced round.

SAFEs skip interest but use similar cap/discount mechanics. MFN (most favored nation) SAFEs adopt best terms from later SAFEs — complicating manual math without a model, especially when multiple bridges close at different caps before Series A.

Why it matters

• Founders: Run a full cap table model before signing term sheets. Uncapped stacks from multiple bridges can leave surprisingly little founder ownership after Series A.
• Investors: Verify conversion price, whether pre-money or post-money SAFEs dilute differently, and that qualified financing thresholds actually trigger conversion.

Common mistake

Using headline Series A valuation without subtracting note conversion shares from pre-money — priced round share counts depend on fully diluted capitalization including converted notes.

Related ideas

See also KISS note, SAFE, valuation cap, and cap table modeling.