VC & PE Glossary
What Is Note Conversion Math?
Updated
Definition
Note conversion math is the calculation that determines how many shares a convertible note or SAFE converts into at a priced equity round — applying valuation cap, discount, and interest accrual rules.
Useful for: Founders, Investors
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.
Related terms
- Cap Table — A cap table (capitalization table) is the record of who owns equity in a company — shares, options, warrants, and convertible instruments — and how ownership percentages change after each financing.
- KISS Note — A KISS note is a standardized convertible security — Keep It Simple Security — published by 500 Global (formerly 500 Startups) as a lightweight alternative to custom convertible notes or SAFEs for early fundraising.
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Common questions
Short answers for founders, LPs, and operators