Meaning and transaction use
An SEC-filed convertible-note agreement sets the conversion price at the lower of 80% of the qualified-financing price or a valuation-cap price based on fully diluted outstanding shares. [S1]
The same agreement states that conversion shares equal outstanding debt divided by the conversion price and requires financing documents at conversion. [S1]
An SEC filing distinguishes SAFE treatment from a debt instrument such as a convertible note. [S2]
Worked example
Illustrative note conversion only. Assume principal of 600,000, accrued interest of 36,000, a round price of 4.00 and a 20% conversion discount. The discount price is lower than the assumed cap price.
Scroll the table horizontally to view all columns.
| Measure | Calculation | Result |
|---|---|---|
| Convertible balance | 600,000 + 36,000 | 636,000 |
| Discount price | 4.00 x 80% | 3.20 |
| Conversion shares | 636,000 / 3.20 | 198,750 |
| Discount to round price | 4.00 - 3.20 | 0.80 per share |
The illustrative note converts into 198,750 shares at the discounted price of 3.20.
Proposed transaction review process
Inventory notes
Record principal, interest, maturity, security and amendments.
Map triggers
Identify qualified financing, maturity, sale, default and optional conversion.
Calculate balances
Reconcile principal, accrued interest, fees and repayments.
Model outcomes
Compare discount, cap, repayment and equity scenarios.
Evidence checklist
Note
Executed instrument, amendments, security and guarantees.
Ledger
Principal advances, interest, repayments and fees.
Capitalisation
Defined fully diluted shares and convertible securities.
Financing
Threshold, price, share class, rights and closing date.
Decision framework
| Situation | Proposed action |
|---|---|
| Maturity precedes financing | Apply extension, repayment or conversion rights from the note. |
| Cap price is lower | Use the document's comparison and capitalisation definition. |
| Interest converts | Reconcile accrued interest through the conversion date. |
| Notes have different terms | Calculate each instrument separately. |
Common errors to check
- Ignoring accrued interest.
- Applying the discount to valuation instead of price without support.
- Using the wrong fully diluted denominator.
- Treating conversion as automatic when the note provides an election.
Reconcile convertible-note outcomes
Bring the notes, debt ledger, cap table and financing terms to a conversion review. Compare cap, discount and maturity outcomes.
Discuss the transactionPrimary references and editorial scope
- SEC filing: Convertible-note conversion agreement
Example qualified-financing conversion price, discount, valuation cap, fully diluted denominator and share calculation. Reference checked 17 September 2026. - SEC filing: SAFE and convertible-note distinction
Example description distinguishing a SAFE contractual right from convertible-note debt. Reference checked 17 September 2026.
General transaction education using public United States filings. Figures are hypothetical. Executed note terms, corporate law, tax and accounting analysis determine actual outcomes.
General business information. Obtain advice appropriate to the legal, tax, accounting and financing facts. No offer, lender commitment or transaction outcome is represented. All worked examples use expressly assumed figures. Editorial draft date: 17 September 2026.
