Interest (in a convertible note)

Interest in a convertible note provides the rate at which the principal investment amount compounds over time. Upon conversion, the original investment in the note plus the interest accrued, is converted to equity. For example, if an investor invests $1 million in a convertible note with 5% interest, and a year later, is converted at a valuation of $10 million. The investor will own $1 million * 1.05 = $1.05 million / $10 million = 10.5% of the company. Interest is often combined with other terms in a convertible note, including caps, discounts and warrants. Interest on convertible notes is often relatively low as the intent is for conversion to equity to occur (and thus more focus is generally given to conversion terms).