You can lend money to a company or buy its shares. A Convertible note connects these routes: it starts as debt, but its contract allows or requires conversion into shares when conditions are met. Until then, lending alone does not make the holder a common shareholder. The investor considers when and how repayment will happen, alongside the value of a possible ownership stake. That is why the interest rate or conversion price alone is not enough. Early repurchase rights, settlement method and priority if the company runs into trouble also matter. Buying bitcoin does not exempt a company from these questions.
SEC is the US Securities and Exchange Commission. The SEC distinguishes a Convertible note, a current debt obligation, from a SAFE (Simple Agreement for Future Equity), an agreement for a possible future equity stake upon a contractual event. For debt, check principal, the basic amount owed, interest, maturity and conversion terms. Not every instrument converts whenever the holder asks. Providing money alone gives neither a common shareholder’s current vote nor ownership of the company’s bitcoin. A SAFE should not be treated as a current share either; its terms can differ substantially from debt. [2]
USD means US dollars. Our own example has principal of 1000 USD and a fixed conversion price of 50 USD. Settlement entirely in shares means 1000/50 = 20 shares. At a share price of 30 USD these are worth 600, and at 80 USD they are worth 1600. We have valued those shares, not calculated the note’s trading price. Nor is this a guaranteed minimum of 1000 USD that the investor always receives. The debt’s market price reflects remaining time, the value and terms of the conversion option, the company’s ability to pay and how easily the instrument can be sold. [1]
Strategy is a company that buys and holds bitcoin. A share may trade above the conversion price while the contract still requires other conditions. For the issue announced on 20 February 2025, Strategy specified periods and events allowing conversion. Strategy chooses settlement in cash, shares or a combination. These are historical terms of that issue, not universal rules. Distinguish the right to request conversion from a right to receive every share in a simple calculation automatically. Check who decides, when the right can be exercised and what the holder will actually receive. [3]
Here, the issuer means the company that issued the debt instrument. A coupon is a regular interest payment. Our zero-coupon example costs the investor 950 USD and returns 1000 after two years if repaid properly. The total return is 1000/950−1, about 5.26%, not an annual rate. In another example, principal of 1000 yields only 980 to the issuer after fees, but repayment is 1000. A zero coupon therefore does not mean zero economic cost. Conversion also does not remove default, price or resale risk. These questions remain even without regular interest payments. The investor’s return here is before their taxes and trading fees. [4]
Maturity is the date repayment is due under the terms. A call lets the company repay early. A put or repurchase right may instead let the creditor require the company to buy back the debt instrument and pay the creditor. Strategy’s published terms of 20 February 2025 set maturity on 1 March 2030, but holders could require repurchase on 1 March 2028. The company’s call had a different date and price conditions. Such a right to earlier cash changes the funding plan. A distant maturity year is not enough if the contract can require money before then. [3]
BTC stands for bitcoin. The SEC distinguishes secured, senior unsecured and subordinated debt. Security means specified collateral supports repayment; senior describes priority relative to other claims, not automatic collateral. In our simplified insolvency example, the company has assets worth 100 USD and owes 60 to a senior secured creditor and 80 to a single further group of unsecured creditors. Ignoring other costs leaves 40, so 40/80 = 50% for that group. Ranking ahead of shares did not ensure full repayment. Corporate BTC holdings alone do not create a pledge securing noteholders. We assume the collateral fully covers the secured claim. [4]
Not every conversion has a fixed price. The SEC also highlights formulas tied to the current market. Our example converts 1000 USD at 80% of market price: with shares at 10 USD, 1000/(0.8×10) = 125 shares. At 5 USD, it becomes 250. That is not the fixed ratio of 20 from the earlier example. In this formula, a lower price means more shares and potentially greater ownership dilution for others. Check the price floor, cap, adjustments and whether interest is added to the amount converted. [1]
Bitcoin Per Share (BPS) tells us how much bitcoin corresponds to each share. Here we use the gross ratio, which does not itself subtract company debts. In our example, the company holds 100 BTC and has 100000 shares outstanding. It borrows 1000000 USD, deducts costs of 20000 and, at a price of 50000 USD, buys another 19.6 BTC. Basic BPS rises to 119.6/100000 = 0.001196. If all principal is hypothetically converted into shares at 50 USD, another 20000 shares appear: 119.6/120000 is about 0.00099667, below the original 0.001 BTC. Assumed Diluted Shares is a company-defined count including assumed additional shares, not evidence that conversion has happened. After the model debt is extinguished, do not deduct it again. Cash settlement needs another scenario. In SEC EDGAR, the public US regulatory filings database, check the contract and subsequent reports. The purchase prices in this example include all buying fees; no further costs are deducted from that amount. [5] [6]
For the clearest picture, read this entry together with Dilution, Capital structure, Refinancing risk, Bitcoin per Share. The reverse links also lead from Dilution, Preferred stock, Capital structure.