Venture Capital & Seed Financing
Convertible Note Cap vs Discount Conversion Formula
Calculate Accrued Simple-Interest Note Balance, Effective Conversion Price MIN(P_round * (1 - d), V_cap / S_pre), Converted Preferred Shares, and Day-1 Paper Multiple on Principal.
Model accrued simple interest and the investor-favorable MIN(Discount, Cap) rule!
Unlike a non-interest-bearing SAFE, a Seed Convertible Promissory Note accrues simple annual interest r_ann over m_months until a Qualified Financing closes, raising Convertible Balance to Bal_conv = Principal * (1 + r_ann * (m_months / 12))! When the priced Series A round closes at New Investor Share Price P_A on S_pre pre-money shares, the note holder receives the LOWER (more favorable) of two conversion prices: Discount Price P_disc = P_A * (1 - d_disc) or Valuation-Cap Price P_cap = V_cap / S_pre, compressed cleanly as P_conv = MIN(P_A * (1 - d_disc), V_cap / S_pre)! Notice the exact Crossover Pre-Money Valuation V_cross = V_cap / (1 - d_disc): below V_cross the Discount wins, and above V_cross the Valuation Cap wins!
Verify on Note_Principal P_0 = $500,000 (B2), Annual_Interest_Rate r_ann = 0.08 (8.0%, B3), Months_Held m_el = 18 (1.5 years, B4 -> Accrued Balance = $560,000 in E2), Discount_Rate d_disc = 0.20 (20.0%, B5), Valuation_Cap V_cap = $8,000,000 (B6 -> Crossover Valuation = $8M / 0.80 = $10.00M!), Pre_Money_Shares S_pre = 5,000,000 (B7 -> P_cap = $1.60/sh), and Series_A_Price P_A = $2.50/sh ($12.50M pre-money > $10.00M crossover, B8 -> P_disc = $2.00/sh): Effective Conversion Price is MIN($2.00, $1.60) = $1.60/sh (E3); Converted Shares equal 560,000 / 1.60 = 350,000 shares (E4); and Day-1 Paper Multiple on $500k Principal is (350,000 * $2.50) / 500,000 = 1.7500x ($875,000 value, E5)! Lower P_A to $1.80 ($9.00M pre-money < $10.00M): Discount Price $1.44 beats the $1.60 Cap!
| Convertible Note Metric ($500k, 8% for 18m, 20% Disc, $8M Cap, $2.50 Series A) | Formula | Verified Output |
|---|---|---|
| Accrued Convertible Balance ($) | Principal * (1 + r_ann * m_months / 12) | $560,000.00 ($60k Interest) |
| Effective Conversion Price ($/sh) | MIN(P_A * (1 - d_disc), V_cap / S_pre) | $1.60 / sh (Cap < $2.00 Disc) |
| Converted Series A Shares | Bal_conv / P_conv | 350,000 shares |
| Day-1 Paper Multiple on Principal | (Shares_conv * P_A) / Principal | 1.7500x ($875,000 Value) |
Effective Conversion Price & Converted Shares Formula
Validate Principal > 0, r_ann >= 0, m_months >= 0, 0 <= d_disc < 1, V_cap > 0, S_pre > 0, and P_A > 0!
=LET(pr_n, B2, rt_i, B3, mn_h, B4, ds_c, B5, cp_v, B6, sh_p, B7, px_a, B8, IF(OR(pr_n <= 0, rt_i < 0, mn_h < 0, ds_c < 0, ds_c >= 1, cp_v <= 0, sh_p <= 0, px_a <= 0), "Invalid Note Terms", ROUND(MIN(px_a * (1 - ds_c), cp_v / sh_p), 4)))Day-1 Paper Multiple on Invested Principal Formula
Notice how interest accrual AND conversion discount compound multiplicatively: (1 + 0.12) * ($2.50 / $1.60) = 1.12 * 1.5625 = 1.7500x!
=LET(px_cv, MIN(B8 * (1 - B5), B6 / B7), IF(ISTEXT(E3), E3, ROUND(((B2 * (1 + B3 * B4 / 12)) / px_cv) * B8 / B2, 4)))Try the example
Use the original values or change them to test your understanding.