How to Record Interest on Your Convertible Notes

If you've raised capital through a convertible note, congrats — you've likely sped up your fundraising and avoided the headache of setting a valuation too early. But there's an important piece many early-stage founders overlook after the wires hit: recording the interest accrued on those notes.

It’s easy to forget. No one is sending you monthly invoices for it. No cash is actually moving. But from an accounting perspective, it’s a real liability — and it needs to be captured accurately on your books.

What Is Convertible Note Interest, Anyway?

Convertible notes are debt instruments that "convert" into equity, typically at your next financing round. Until they convert, they behave like loans. And like most loans, they accrue interest over time — often at 4%-8% annually, depending on your note terms.

Even if your investors never expect to be repaid in cash, that interest still adds to the amount of money that eventually converts into equity. Ignoring it can throw off your cap table math, confuse future investors, and create unnecessary accounting messes down the line.

Why Recording Interest Matters

• Cap Table Accuracy: The accrued interest increases the "investment amount" when notes convert. If you don’t record it, you could miscalculate dilution at your next round.
• Financial Diligence: Serious investors (especially institutional ones) will look for accurate liabilities in your diligence materials. Missing accrued interest is a red flag.
• Audit & Compliance: If you're ever audited or need to provide GAAP-compliant financials, improperly recorded convertible debt can be a major issue.
• Founder Credibility: Clean, accurate books show you’re buttoned-up — a huge trust signal for investors.

How Often Should You Record It?

At the very least, you should record convertible note interest annually — ideally at your fiscal year-end. If you want best-in-class financials (and make things easier for future raises), recording quarterly is even better.

Here's the basic process:

1. Review your note agreements for the interest rate.
2. Calculate accrued interest to date (Principal x Interest Rate x Time Outstanding).
3. Add the accrued interest as an "Interest Payable" liability on your balance sheet.

A simple journal entry can keep you compliant and organized.

Common Mistakes We See

• Forgetting to accrue interest at all until a priced round is imminent (cue the scramble!)
• Thinking "we'll just waive the interest later" without legal documentation
• Only updating interest when cash is paid (most notes don't pay cash interest)
• Understating liabilities, which skews burn and runway metrics

✨ Need a quick health check on your books? Get in touch — we’d love to help.

‍