Convertible Note & Cap Table Math — Complete Guide & How to Use

Convertible note math can get complicated quickly because one financing event can affect ownership percentages, dilution, and conversion terms all at once. DocketMath’s convertible note cap table calculator helps founders, finance teams, and investors model how a note converts into equity and what the post-conversion cap table looks like.

Use it to answer practical questions like:

• How many shares does the note investor receive?
• What happens if the discount rate changes from 15% to 20%?
• How does a valuation cap change the conversion price?
• What does the cap table look like after the note converts?
• How much dilution do founders and existing holders absorb?

For a direct workflow, open the tool here: /tools/convertible-note-cap-table.

What this calculator does

Convertible notes are debt instruments that usually convert into equity at a later financing. The conversion often depends on one or more of these terms:

• Principal amount
• Accrued interest
• Discount rate
• Valuation cap
• Qualified financing threshold
• Pre-money or post-money pricing mechanics

DocketMath uses the inputs you provide to calculate the equity outcome. In practice, the calculator can show:

A convertible note can convert in more than one way, and the calculator helps compare those paths. For example:

• If the discount price is lower than the cap price, the note converts at the discount.
• If the cap price is lower, the note converts at the cap.
• If no cap or discount applies, the note may convert at the round price.

Core inputs and what they mean

DocketMath is especially useful when a company has existing SAFEs, common stock, option pools, and multiple notes. Those pieces interact, so a clean cap table model saves time and reduces errors.

When to use it

Use the calculator whenever you need to model how a note will affect ownership before or after a priced round. The most common uses are planning, diligence, and investor communication.

Founders and finance teams

Founders usually need this model before setting a financing target. It helps answer questions such as:

• How much dilution will the note create at a $6 million pre-money valuation?
• If the company raises $1.5 million on the note today, what happens at conversion?
• Does the valuation cap create more dilution than the discount?

A finance lead can also use the calculator to prepare a board update or investor deck with a clean ownership breakdown.

Investors and counsel support

Investors often want to know whether the note terms are economically fair compared to the priced round. The calculator makes it easier to compare scenarios without hand-built spreadsheet formulas.

Typical review questions include:

• Is the cap too low relative to the priced round?
• Does the discount stack with the cap, or does only one apply?
• What ownership does the note convert into if the company raises above the cap?

Cap table cleanup

A company may also use the tool during data cleanup when historical notes were issued over several closings. That is especially helpful when:

• Notes were issued on different dates
• Interest was not tracked consistently
• Multiple investors have different caps or discounts
• The option pool changed before the round closed

Before signing or closing a round

Run the math before a financing closes so everyone sees the same output. That reduces avoidable disagreements over:

• Conversion price
• Fully diluted share count
• Treatment of accrued interest
• Whether the note converts before or after the new preferred stock issuance

Step-by-step example

Let’s walk through a simple conversion example using realistic numbers.

Example facts

A startup has:

• Convertible note principal: $500,000
• Annual interest: 6%
• Time outstanding: 18 months
• Discount: 20%
• Valuation cap: $4,000,000
• New priced round pre-money valuation: $8,000,000
• Pre-money fully diluted shares: 8,000,000

Step 1: Calculate accrued interest

The note accrues interest over 18 months.

• Annual interest = $500,000 × 6% = $30,000 per year
• For 18 months = $30,000 × 1.5 = $45,000

So the conversion amount becomes:

• Principal + interest = $545,000

Step 2: Calculate the priced round share price

Using the pre-money valuation and fully diluted shares:

• $8,000,000 ÷ 8,000,000 shares = $1.00 per share

That is the round price before note adjustments.

Step 3: Apply the discount

A 20% discount gives the note holder a lower effective conversion price:

• $1.00 × (1 - 0.20) = $0.80 per share

Step 4: Apply the valuation cap

The valuation cap also creates an implied conversion price:

• $4,000,000 ÷ 8,000,000 shares = $0.50 per share

Since $0.50 is lower than the discounted $0.80 price, the cap is better for the note holder and controls the conversion.

Step 5: Calculate note shares

Now divide the conversion amount by the cap-based price:

• $545,000 ÷ $0.50 = 1,090,000 shares

Step 6: Update the cap table

After conversion, the note holder receives 1,090,000 shares. If the company also issues new shares in the priced round, the full post-money table will include:

• Existing common shares
• Option pool shares
• New preferred shares issued to the incoming investor
• Converted note shares

A simplified post-conversion ownership view might look like this:

That simplified table shows the conversion effect only. A priced equity round would add another dilution layer based on how many new shares are issued to the incoming investor.

What changes the output?

If any of these inputs move, the output changes immediately:

• Higher valuation cap → fewer shares for the note holder
• Lower valuation cap → more shares for the note holder
• Higher discount → more favorable conversion for the note holder
• Longer time outstanding → more accrued interest and more shares
• Higher round valuation → lower dilution from the note if the cap does not control

Common scenarios

Convertible note math usually falls into one of a few patterns. DocketMath helps you compare these outcomes side by side.

1) Discount-only conversion

Sometimes the note has a discount but no cap.

What happens:
The note converts at a percentage discount to the round price.

Example:
If the round price is $2.00 and the discount is 15%, the note converts at:

• $2.00 × 85% = $1.70

This structure is straightforward, but note holders may receive less protection than they would with a cap.

2) Cap-only conversion

Some notes use a valuation cap without a discount.

What happens:
The note converts at a price based on the cap if that is more favorable than the round price.

Example:
If the cap-based price is $0.65 and the round price is $1.20, the note converts at $0.65.

This usually benefits the note holder in a strong priced round.

3) Cap and discount together

This is very common.

What happens:
The note compares both prices and uses the lower one.

• Discount price = round price × (1 - discount)
• Cap price = cap ÷ fully diluted shares

The lower price wins, which means a lower price per share and more shares issued to the note holder.

4) Interest-bearing conversion

Many notes accrue simple interest before conversion.

What happens:
Interest increases the conversion amount, even if the principal stays the same.

A note with $250,000 principal and 8% interest over 2 years adds $40,000 in interest, so the conversion amount becomes $290,000.

5) Multiple notes in one round

Startups often have several notes from different closing dates or investors.

What happens:
Each note may have its own principal, interest, cap, and discount.

That means one note might convert at a cap while another converts at a discount, creating a layered dilution outcome.

6) Note converts before or alongside the equity round

Conversion timing matters.

What happens:
If notes convert before the priced round, the converted shares are included in the fully diluted base before the new investor’s shares are priced. If notes convert alongside the round, the

Related reading

• Inputs you need for convertible note cap table math in United States (Federal) — Input checklist with sourcing guidance
• Worked example: convertible note cap table math in North Carolina — Worked example with real statute citations
• Convertible note cap table math in New Hampshire — Full how-to guide with jurisdiction-specific rules