Interest changes the amount; the cap changes the price.
A note may convert both principal and accrued interest into equity. Under this model, the applicable conversion price is the lower of a valuation-cap price and a discounted new-money price.
Real documents may convert interest at a different price or settle it in cash. Capitalization definitions can also include or exclude other convertibles and option reserves. Those choices cannot be inferred from the word “cap.”
The formula, made clear.
- Simple interest
- Principal × annual decimal rate × years, with no interest on interest.
- Cap capitalization
- The share count explicitly defined by the note documents.
- Converted balance
- Principal and all modeled accrued interest at the same selected price.
Put the numbers in context.
$500,000.00 at 8% for 18 months accrues $60,000.00. A $5,000,000.00 cap over 1 million shares gives $5.00, below the $6.40 discounted price, so $560,000.00 converts into 112,000 shares.
| Input | Example value |
|---|---|
| Note principal | $500,000.00 |
| Annual simple interest rate | 8% |
| Interest accrual period | 18 months |
| Pre-money valuation cap | $5,000,000.00 |
| Cap capitalization shares | 1,000,000 shares |
| Priced-round share price | $8.00 |
| Conversion discount | 20% |
| Note conversion shares | 112,000 |
What this calculation assumes
One hypothetical pre-money cap-and-discount note. Principal and simple interest convert together at the lower price. No maturity repayment, default interest, day-count convention, other securities or financing share-total calculation.
What to consider next.
Confirm the interest treatment and capitalization definition before inserting the issued shares into the fully diluted cap table.
How we approach financial models →