Accrued Interest

Quick Definition

Interest that accumulates on convertible notes over time, typically converting to additional equity.

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.