FinanceDeal Structure
Simple vs. Compound Interest
Also known as: Interest structure, interest compounding, flat vs. accruing interest
The structural choice on seller notes determining whether unpaid interest accrues to the principal balance. Simple interest keeps the carrying cost flat; compound interest escalates it — creating urgency for the buyer to repay.
WHY IT MATTERS
Most founders negotiate the interest rate on their seller notes but never question the interest structure. That single word — simple instead of compound — can shift millions in value. Under simple interest, $15M at 6% generates $900K per year regardless of how long the principal sits. The buyer's cost of delay never changes. Under compound interest, unpaid interest is added to the principal, so the balance grows and the buyer's cost escalates every year. On a 5-year hold, the difference between simple and compound on $15M at 6% is roughly $1.9M. Simple interest lets the buyer deploy the founder's money in acquisitions and earn returns well above the carrying cost with no escalating penalty.