Check Pre-IPO Note Dilution Before IPO Pricing

The trap is a denominator that moves before pricing

You may hold equity in a company that has raised a pre-IPO convertible note. Before the IPO price is set, the note can convert automatically and change the share count, so your percentage can shrink without a new round you can argue about.

The rule is simple: before pricing, get the post-conversion share count and the conversion terms in writing. If conversion is automatic, the company may not need another board vote, investor consent, or price negotiation to change the denominator.

Nscale announced a $3.36 billion pre-IPO convertible loan note financing led by Third Point on September 25, 2026. The financing includes an initial $2.36 billion note tranche at closing plus a separate $1 billion NVIDIA commitment expected to be funded in mid-November 2026.

Nscale filed a Form S-1 registration statement with the SEC on September 18, 2026 for a proposed IPO of ordinary shares. When Nscale announced the filing on September 18, 2026, it had not fixed the share count or the IPO price range. Nscale applied for a New York Stock Exchange listing of its ordinary shares.

When Nscale's IPO completes, the notes convert automatically into ordinary shares, with NVIDIA's portion becoming non-voting shares. The convertible notes carry no collateral and come due on June 15, 2028, unless conversion or repurchase occurs earlier.

A large pre-listing financing can sit as debt until the IPO, then become equity when the public market sets the price. Automatic conversion can change the share count without a new round price. A non-voting class can move your economic slice and your voting slice in different directions. A maturity date gives the note a clock, and a clock can change incentives.

The rule is to price the conversion, not the headline

A convertible note is a promise to become equity under stated conditions. The conditions matter more than the headline amount. You need the conversion trigger, conversion price or ratio, share count formula, voting rights, and maturity or repurchase terms. If any are missing, you are guessing.

Trigger terms answer when the note becomes a share. Some notes convert only in a qualified financing, a later round that meets a set threshold; some convert at IPO; some convert on a maturity date; and some require board action. That answer decides whether the dilution lands quietly or in a meeting you can attend.

Price or ratio terms tell you how many shares each dollar of note becomes. A lower conversion price creates more shares; a higher conversion price creates fewer. If the ratio can be reset by a later round, a discount, or a valuation cap, a ceiling on the value used for conversion, the final number can move after the note is signed.

The denominator is the fully diluted share count. It should include existing shares, options, warrants, convertible notes, and new IPO shares. If the company gives you a number without line items, ask for them. Your percentage is your shares divided by that denominator.

Voting rights decide whether the new shares can change control. A non-voting class can protect founder control, but it can also make the public share behave differently from the shares you hold. If your class and the note class vote differently, your economic percentage and your voting percentage may not match.

Maturity and repurchase terms decide what happens if the IPO slips. A note that matures before listing can create pressure to convert, refinance, or repay. A repurchase right can turn the financing into a cash claim. A default clause can hand the lender extra leverage. These terms are the emergency exit, and they belong in the checklist.

Run this checklist before the IPO price is set

Ask for the note terms and the pro forma cap table, the ownership table after conversion and the IPO share issuance. Each item below changes the denominator, the vote, or the timing.

• Confirm whether conversion is automatic at IPO or requires a board, shareholder, or lender action.
• Get the conversion price or conversion ratio, and ask whether it can be reset by a later round, discount, or valuation cap.
• Request the fully diluted post-conversion share count, including notes, options, warrants, and new IPO shares.
• Confirm whether the converted shares carry voting rights, and whether any class is non-voting.
• Check the maturity date, repurchase right, and default terms that could force conversion or repayment before listing.
• Ask for the pro forma cap table showing your percentage before conversion, after conversion, and after the IPO share issuance.

The U.S. Treasury's Outbound Rules treat certain conversions of contingent equity interests, or interests that can become equity, as covered transactions. Those rules cover transactions that complete on or after January 2, 2025. Add one compliance question: whether the conversion is a covered transaction.