Common convertible note cap table math mistakes in New York

Convertible notes look simple on paper: “We’ll convert later at a discount or cap.”
In cap table math, they’re anything but simple—especially once you add New York–specific wrinkles (like usury limits and local market norms for MFN, stacking, and SAFE mixes).

This post walks through the most common math mistakes we see when people model New York convertible notes, and how to avoid them with a calculator like DocketMath’s /tools/convertible-note-cap-table.

The top mistakes

• confusing pre-money and post-money caps
• forgetting to apply the discount versus cap test
• ignoring existing option pool dilution
• mixing share class terms

When rules change, rerun the calculation with updated inputs and store the revision in the matter record.

1. Treating all New York notes as if they’re the same

Teams often drop all notes into one “bucket” in the spreadsheet:

• one discount %
• one valuation cap
• one interest rate
• one conversion formula

In New York, it’s very common for:

• early notes to have lower caps and higher discounts
• later bridge notes to have higher caps, MFN, or no discount
• some notes to be SAFE-style, others true debt with interest

If you model them as if they all convert on the same terms, you misallocate:

• how much of the post‑money each noteholder should own
• how much dilution hits founders vs. equity investors
• how much of the round is “primary” vs. “conversion”

Inputs that often differ note‑by‑note:

• Issue date (drives accrued interest)
• Principal amount
• Interest rate and compounding assumptions
• Valuation cap (or none)
• Discount rate (or none)
• MFN or most‑favored cap provisions
• Conversion type (pre‑money vs. post‑money mechanics)

2. Ignoring New York usury constraints in the interest math

New York has some of the strictest usury rules in the U.S. While startups and VC‑style notes are often structured to avoid problems, the math side gets mangled when:

• interest rates are modeled at face value without checking whether they’re:

  • simple vs. compounding
  • stated vs. effective annual rate
• accrued interest is allowed to balloon on long‑dated notes
• default interest is added in spreadsheets but not actually supported (or allowed) under the governing law

A common spreadsheet error: someone enters “12%” and then also compounds monthly, effectively turning it into a higher effective rate that no one intended.

What changes in the outputs:

• Accrued interest at conversion
• Total number of shares issued to noteholders
• Founder and investor dilution

3. Misapplying the valuation cap vs. discount in the conversion price

A frequent error is applying both the cap and the discount at once, or applying them in the wrong order.

Typical New York–style convertible note language says the note converts at the more favorable of:

• the cap price (cap ÷ fully diluted capitalization baseline), or
• the discounted price (preferred share price × (1 – discount))

Common errors:

• Using cap and discount cumulatively
  e.g., compute the cap price and then also apply the discount to that number.
• Using the wrong capitalization base for the cap (excluding vs. including the round, options, SAFEs, etc.)
• Applying the discount to the pre‑money valuation instead of the priced round share price

How this shows up in the numbers:

• Over‑dilution: founders lose more than they bargained for.
• Under‑dilution: noteholders get fewer shares than the contract implies.
• Inconsistent results across different notes in the same New York round.

4. Forgetting to accrue interest correctly by date

Many spreadsheets assume:

• all notes were issued on the same date, or
• interest accrues in whole years only (e.g., 2 years exactly)

In reality:

• New York notes are often issued over staggered closings
• Some accrue interest daily or monthly
• Some have interest start or interest stop dates (e.g., after maturity, or after a certain event)

If you ignore actual dates:

• earlier investors are under‑credited for interest
• later investors are over‑credited
• total dilution shifts subtly but meaningfully

Key date‑driven inputs:

• Issuance date
• Conversion date (closing date of the equity round)
• Day count convention (actual/365, 30/360, etc., if specified)

5. Treating New York SAFEs and notes as if they convert the same way

New York startups often mix:

• Y Combinator‑style SAFEs (post‑money, pre‑money, MFN, etc.)
• Traditional convertible notes (debt with interest and maturity)
• Occasionally, custom “NY SAFE” hybrids

Spreadsheet error: dropping them all in the same “convertible” tab and using one formula.

Key differences that affect math:

If you don’t separate these:

• SAFEs may be over‑ or under‑dilutive
• Notes may be treated as if they have no interest
• The “fully diluted” denominator at closing is wrong

6. Using the wrong New York entity capitalization baseline

Many New York companies:

• start as LLCs and later convert to corporations
• have profits interests, phantom equity, or other incentive units
• have state‑specific option plan quirks (e.g., 409A valuations, NY employee location issues)

Cap table error: ignoring the LLC‑era equity or assuming only “shares of common stock” count.

But for a valuation cap, the definition of “fully diluted capitalization” in the note often includes:

• all common stock
• all preferred stock (on an as‑converted basis)
• options, warrants, RSUs
• sometimes convertible instruments (depending on drafting)

If you miss items that should be in the denominator:

• the effective conversion price is off
• noteholders get more than they should
• later investors see a distorted ownership picture

7. Not modeling multiple New York closings and rolling notes

New York rounds frequently close in tranches:

• initial closing
• one or more additional closings within a set period
• rolling convertible note financings before a priced round

Spreadsheet error: treating the round as if it all happens on one date with one share price.

But if:

• the share price changes between closings
• additional notes convert between closings
• interest continues to accrue between closings

then the cap table should reflect:

• different conversion prices per closing
• different interest accrual periods
• updated fully diluted counts before each closing

How to avoid them

Use a written checklist for inputs, document each source, and run a quick sensitivity check before finalizing the result. When two runs differ, compare inputs line by line and re-run with one variable changed at a time.

Capture the source for each input so another team member can verify the same result quickly.

1. Use note‑by‑note inputs, not “bulk” assumptions

In a calculator like DocketMath’s /tools/convertible-note-cap-table, treat each New York note (or SAFE) as its own row with explicit inputs:

This lets you:

• see per‑instrument conversion price
• confirm that the “most favorable” term is actually being used
• run “what if” scenarios without rewriting formulas

2. Make interest assumptions explicit and reviewable

To avoid interest‑related surprises:

1. Choose a clear accrual method

   • Simple annual interest vs. compounded (monthly/annually)
2. Tie interest to actual dates

   • Use issue date and conversion date instead of “2 years”
3. Show the effective rate

   • If compounding, surface the effective annual rate so counsel can sanity‑check it under New York usury concerns.

3. Encode the cap vs. discount decision, don’t eyeball it

Instead of manually deciding which is better each time:

• Compute cap price:
  cap ÷ fully diluted capitalization baseline
• Compute discount price:
  preferred share price × (1 – discount)
• Use the lower of the two as the conversion price.

Then:

• Show both prices and a “chosen price” column
• Flag any note where the discount and cap are both blank or both zero
  (so you can confirm that’s intentional)

4. Separate SAFEs from notes, even if they convert in the same round

In your modeling:

• Put notes on a “debt conversion” grid:

  • principal
  • interest
  • cap/discount
  • conversion price
• Put SAFEs on a “SAFE conversion” grid:

  • purchase amount
  • valuation cap and/or discount
  • post‑money vs. pre‑money logic

Then, build a combined summary that:

• adds all resulting shares into the fully diluted post‑money
• clearly labels each instrument type for review

5. Mirror

Related reading

• Worked example: deadlines in New York

• Common deadlines mistakes in Australia

• Common interest mistakes in Rhode Island

• Why we started the DocketMath blog