Interest Rate (Convertible Note)
The annual rate at which a convertible note accrues interest, adding to the amount that converts.
Definition
Convertible notes accrue simple interest at a specified annual rate, typically 2-8%. The accrued interest converts to equity alongside the principal at the next priced round, effectively giving the note holder extra shares. Higher interest rates benefit the investor and increase dilution for existing shareholders. SAFEs do not have interest, which is one of their key advantages for founders.
Why it matters
Interest on convertible notes creates additional dilution that compounds over time. A $1M note at 6% interest that does not convert for 2 years means $1.12M converts, giving the investor 12% more shares than the principal alone would have.
Example
A $500K convertible note at 5% annual interest converts after 18 months. Accrued interest is $37,500. The investor converts $537,500 worth of shares at the Series A price, getting 7.5% more shares than the original $500K would have bought.