How to compare interest and repayment provisions for Convertible Note Financing Transactions

Compare convertible notes by reconstructing each instrument’s accrual rules and testing payment obligations against common financing, maturity, prepayment, and default scenarios. For company counsel, the deliverable is an economics matrix connecting calculations to controlling language, separating cash obligations from amounts eligible for conversion, and assigning unresolved questions. Start with executed documents and actual funding records—not headline rates. Reconcile the calculations with finance, then identify drafting changes, required consents, and liquidity exposure before recommending acceptance or amendment.

When to use this workflow

Use this review when a company negotiates new notes, adds investors on different terms, amends outstanding debt, or assesses repayment exposure before an equity financing. It serves company counsel, in-house teams, and finance personnel comparing payment consequences rather than coupon rates alone.

The scope is interest and repayment, including conversion provisions that affect cash exposure—not complete financing diligence. This US-oriented workflow provides process recommendations, not matter-specific advice. Rights depend on actual language, governing law, facts, and deal context. Usury, tax, security, and enforceability require separate analysis. The historical agreements cited illustrate negotiated wording, not market standards or current obligations.

What you need

Collect the purchase agreement, notes, term sheet, amendments, side letters, waivers, and incorporated schedules. Include senior-debt and subordination documents that may restrict payments. Separate executed instruments from proposals.

Obtain these supporting inputs:

• Dated funding records, advances, repayments, and payments made on the company’s behalf.
• Finance’s interest ledger, capitalization entries, prior calculations, and proposed review date.
• Definitions governing financing events, maturity, business days, default, and conversion elections.
• Notices, holder elections, consents, extensions, and waivers.
• Cash forecasts for tested payment dates and company negotiating instructions.

Assign stable document IDs and link amendments to their underlying instruments. Missing attachments matter: a purchase agreement can establish a funding arrangement without supplying the operative interest provisions.

Use the template

Convertible Note Financing Transactions — Convertible note economics matrix

You can copy this table into your working document or spreadsheet. Use one row per instrument and scenario; add rows when events produce different payment outcomes.

“Source / status” identifies the document, clause or page, and execution status. “Funding / basis” records advances, balance changes, and calculation dates—not merely the commitment.

“Interest mechanics” captures rate, day count, accrual start, capitalization, and cash or payment-in-kind (PIK) treatment. “Event / control” identifies the trigger and election holder. “Amount / treatment” separates cash payable, capitalized principal, and potentially convertible amounts; reference calculation cells rather than concealing assumptions in totals.

Distinguish missing evidence from interpretation questions. An unknown advance date is an evidence gap; ambiguity over whether a premium covers capitalized interest is a drafting issue. Assign both an owner and next action.

Step by step

1. Establish the controlling document set

Read the purchase agreement and note together, applying amendments and waivers only to provisions they change. Check whether a maturity extension also changes interest, default treatment, or conversion rights. Do not treat a circulating draft as operative.

Record holder-specific differences. Identify precedence provisions and amendment thresholds relevant to proposed corrections; do not assume a majority decision changes every holder’s rights.

Matrix output: document IDs, operative citations, execution status, and missing-document flags. Preserve competing readings where document priority remains unresolved.

2. Reconstruct the interest-bearing balance

Reconcile face amounts with actual advances and subsequent movements. Verify the contractual accrual start rather than substituting the signature or wire date. Support each balance change with dated evidence.

The MiNK–Agenus agreement, Article I.1 illustrates consent-based drawdowns and an updated schedule recording advances or payments made on the company’s behalf, with dates for tracking accrual. Its parent-subsidiary structure is not a startup benchmark, and the referenced note attachment is not substantively reproduced on that page; no interest rate should be inferred from it.

Matrix output: verified amounts, dates, ledger references, and differences between committed and funded balances.

3. Normalize the accrual mechanics

Extract regular and default rates, day count, partial-period treatment, payment frequency, and capitalization dates. Determine whether interest accrues on capitalized amounts and whether default interest replaces or supplements the regular rate. Flag notice, cure, and cessation conditions for that rate.

For expressly simple actual/365 interest, calculate each constant-balance interval as principal × annual rate × actual days ÷ 365. Reconstruct capitalization before modeling PIK or compound provisions. Have finance verify date inclusion, interval boundaries, and rounding.

The Core Scientific note form, Exhibit A, opening interest provisions combines quarterly cash payments, quarterly PIK capitalization, and actual/365 computation. A single coupon field would conceal those different cash and balance effects.

Matrix output: accrual assumptions, calculation references, and separate regular, PIK, and default-interest treatments.

4. Map repayment triggers and holder choices

Test maturity, voluntary prepayment, acceleration, and relevant financing or sale events separately. Identify notice periods, election windows, premiums, and who controls repayment or conversion. For default scenarios, distinguish an alleged breach from satisfaction of contractual acceleration conditions.

Do not assume financing extinguishes debt or early payment occurs at par. The historical Core Scientific form, Exhibit A §§ 1(b)(i) and 2(a) provides optional holder conversion following defined Offering events. Conditional voluntary prepayment requires ten business days’ notice and applies a 200% multiplier to the specified principal-and-interest amount. These unusual terms are examples, not benchmarks.

Matrix output: separate cash outcomes, controlling elections, notice requirements, and unresolved payment-versus-conversion interactions.

5. Reconcile interest with conversion and payment priority

Determine whether conversion covers principal, accrued cash interest, capitalized interest, or selected components. Check whether interest uses the principal conversion price. Keep residual cash interest visible even if principal converts.

Trace partial payments through the operative waterfall. Calculate alternative outcomes where premium language could cover principal alone or a broader payoff base; do not settle ambiguity through spreadsheet assumptions.

If conversion-share authorization evidence is missing, assign that dependency separately. Missing evidence does not establish either effective conversion or mandatory repayment.

Matrix output: component treatment, waterfall assumptions, conversion cross-references, and alternative calculations for disputed wording.

6. Test cash exposure against payment restrictions

Compare modeled payments with senior-debt, subordination, and consent provisions. Separate what the note requires from what another agreement permits; investigate their interaction rather than assuming a payment prohibition cancels the debt.

Ask finance to assess cash available on each tested date, including holder-controlled repayment scenarios. Do not count anticipated financing proceeds as available without recording the closing and funds-flow assumptions. Prioritize an unfunded maturity over a modest coupon difference.

Matrix output: gross cash requirement, restriction citation, liquidity assessment, and consent or interpretation owner. Keep “contractually due,” “permitted to pay,” and “cash available” distinct.

7. Turn differences into company instructions

Prepare targeted revisions: clarify accrual dates, capitalization frequency, conversion of interest, premium base, or contradictory payment language. State each change’s financial consequence and the company’s fallback.

Retest after revisions. A lower rate may not compensate for earlier maturity or holder-controlled repayment. Obtain counsel’s interpretation and finance’s calculation confirmation, recording qualifications rather than treating either review as a substitute for the other.

Matrix output: proposed change, decision owner, fallback, and resolution evidence linked to the revised provision. Retain unresolved items explicitly.

Worked example

Fictional scenario: Alder Quay Robotics, Inc. compares two outstanding notes before a proposed financing and reviews a third funding arrangement. All parties, instruments, amounts, and clauses below are fictional.

Notes A and B each have $1 million outstanding. Verified funding records and contractual counting rules establish 180 accrual days through the proposed closing date. Neither has prior payments or capitalization. Both defer interest until conversion or maturity, and neither modeled outcome includes fees or premiums.

Note A bears 8% simple actual/365 interest. Its § 5 automatically converts principal and accrued interest when defined financing conditions are met. Its maturity is later than the proposed closing. Note B bears 10% simple actual/365 interest, matures on the proposed closing date, and permits the holder to convert principal and accrued interest instead of receiving cash.

Counsel has not confirmed that the financing satisfies A’s definition. No election has been received for B. Arrangement C states a $500,000 commitment, but its note attachment and advance schedule are missing.

The rounded interest difference is $9,863.02, but B’s potential $1,049,315.07 closing-date cash requirement drives the immediate decision. A’s conversion cannot yet be assumed; if its trigger fails, the debt remains outstanding under the stated fictional terms, rather than becoming immediately payable merely because the financing occurs. C cannot be modeled from its commitment.

The company should prioritize B’s election and liquidity analysis, verify A’s financing trigger, and obtain C’s missing evidence—not rank the arrangements by coupon alone.

Common mistakes

• Comparing coupons without capitalization. Recalculate balances and distinguish cash interest from PIK.
• Treating every financing as automatic conversion. Verify each trigger, election, and accrued-interest treatment.
• Assuming prepayment equals principal plus interest. Check premiums, conditions, notice, and intervening conversion rights.
• Using commitments as funded principal. Reconcile dated advances; mark unsupported balances unknown.
• Presenting a payoff as executable without checking other debt. Identify restrictions, required consents, and available cash separately.

Final quality check

• Verify every operative term against its source, with document ID and clause or page citation.
• Distinguish executed terms from proposals, missing attachments, and superseded versions.
• Reconcile funding dates and balances to company records.
• Obtain finance’s check of accrual, capitalization, premiums, and rounding.
• Test maturity, prepayment, acceleration, and relevant conversion outcomes separately.
• Separate cash payments, converted amounts, and residual components.
• Assign reviewers for restrictions, election evidence, and liquidity assumptions.
• Resolve material gaps with evidence or expressly assign them and qualify the decision relying on them.

Complete the workflow with DecoverAI

DecoverAI is the Legal Intelligence Platform for litigation and transactions. Its contract review and tabular review capabilities can support comparison across notes. In Word, choose the company as the represented party and provide deal-specific instructions. Findings quote clauses, rank severity, locate text, and identify missing language as not present. Lawyers can edit or insert suggestions as ordinary tracked changes under the signed-in Word user’s name, or dismiss findings with reasons. Keep calculations and the matrix as independently reviewed work products. To discuss this workflow, book a demo.

Frequently asked questions

Should every note use the same comparison date?

Use a common date for comparing accrued balances, then add event-specific dates for maturity, prepayment, or financing. Preserve each instrument’s funding history and contractual day-count rules.

How should cash interest and PIK interest be compared?

Show current cash requirements and capitalized balances separately. Test later repayment and conversion treatment, including whether capitalized amounts earn further interest under the document.

What if the note is silent about converting interest?

Record the gap and review related definitions and agreements. Do not assume principal’s mechanics cover interest. Seek clarification where appropriate and retain alternative calculations until counsel resolves the interpretation.

Can finance approve the matrix without counsel?

Finance should validate balances, calculations, and liquidity. Counsel should validate contractual interpretation, elections, and restrictions. Record both reviews and their qualifications rather than one undifferentiated approval.

Sources

• MiNK–Agenus Convertible Promissory Note Purchase Agreement, February 12, 2024, Article I.1: dated advance schedules and drawdown structure.
• Core Scientific Convertible Note Purchase Agreement, August 20, 2021, Exhibit A: cash and PIK interest, conditional prepayment, repayment, and optional conversion wording.

This guide is general information about legal workflows, not legal advice for any matter. It was drafted and reviewed with AI assistance. The worked example is fictional. Contract rights and procedure depend on the governing law, the actual wording, and the facts, so check the cited sources and the rules that apply in your jurisdiction before relying on it.