What is Accrued Interest?
Convertible notes earn interest (typically 4-8% annually) that accumulates over time. At conversion, this interest usually converts to additional shares rather than being paid in cash.
Interest Impact
On a $500K note at 6% held for 2 years, accrued interest adds $60K. That extra $60K converts to shares, giving the investor more equity than the principal alone would provide.
SAFEs vs. Notes
SAFEs don't accrue interest. This is one key difference from convertible notes. Founders often prefer SAFEs to avoid the complexity and extra dilution from accrued interest.
Formula
Simple Interest Accrual:
Accrued Interest = Principal x Rate x Time
Total Converting = Principal + Accrued Interest
Example: $500K at 6% for 18 months:
$500K x 0.06 x 1.5 = $45K accrued
Example
Convertible note: $300K at 5% interest.
Time to conversion: 2 years.
Accrued interest: $300K x 5% x 2 = $30K
Total converting: $330K
If conversion price is $1/share:
Original principal: 300,000 shares
With accrued interest: 330,000 shares
10% more dilution from interest alone.