Convertible Note Accounting: Founder Lessons From Anthropic’s $72 Billion Charge

A $72 billion accounting charge drove most of Anthropic’s reported first-half loss, and none of it was cash. The cause is how convertible notes are measured at fair value. Here is how the rules work, the choices founders make at issuance, and the questions to settle early.

Anthropic’s draft IPO prospectus puts its January-to-June 2026 loss at $80.7 billion, Reuters reported on Oct. 20, and $72 billion of it is an accounting charge on bonds that can turn into Anthropic stock. That charge cost no cash. It is an unusually large public example of something every founder who raises on notes should understand: convertible note accounting can turn a rising valuation into a reported loss.

Plenty of startups never see a charge like this, because they never elect fair value treatment and have no conversion feature that must be split out. Those that do can find their income statement swinging with every priced round.

Where it stands: The filing is still under confidential SEC review, and none of the reporting describes Anthropic’s accounting election, so the method behind the charge is unknown. Reuters said Anthropic “did not respond to a Reuters request for comment.” Our explainer on confidential IPO filings covers why the numbers are surfacing from a draft.

Why good news shows up as a loss

Think of the instrument as debt with an option to swap into shares. If you need a refresher on how notes work, start with what a convertible note is.

From the holder’s side, the note’s value tracks the stock it can turn into. When the company’s valuation jumps, the note becomes worth more. From the issuer’s side, that same note is an obligation, and the obligation has grown. If the accounting measures it at fair value, the growth lands in the income statement as a loss.

PitchBook’s summary of the Anthropic case: “As Anthropic’s valuation rose, the notes became more valuable, and accounting rules require the company to book that increase as a loss.” NYU Stern accounting professor Joshua Ronen, writing to Forbes about the 2025 charge, was blunter: “The loss is a consequence of good news.”

The two routes in convertible note accounting

Under U.S. GAAP, a convertible can reach fair-value swings in earnings by two paths. A third case keeps it out of that territory altogether.

Approach What sits on the balance sheet Where value changes go
Fair value option The whole note, at fair value Net income; own-credit piece to OCI
Bifurcation Debt host plus a separate derivative Derivative changes hit earnings
Neither A single debt liability No fair-value remeasurement

Fair value option. Under ASC 825-10, an issuer that elects it must “measure the financial liability at fair value with qualifying changes in fair value recognized in net income.” Any movement traceable to the issuer’s own creditworthiness is routed instead to other comprehensive income. Electing the option for a convertible means nothing gets carved out: Deloitte’s guide says “no embedded derivative features would be bifurcated and any issuance costs would be expensed at inception.”

Bifurcation. If the conversion feature meets the derivative criteria in ASC 815-15 and no election is made, it is pulled out of the note. PwC describes the result as a feature “classified on the balance sheet as a derivative liability at fair value with any changes in its fair value recognized currently in the income statement.” The remaining debt is carried separately.

Either path can produce a charge like Anthropic’s when the share price soars. Which one Anthropic took has not been reported.

Choosing the fair value option, and living with it

The election is made when the note is issued, and it sticks. Deloitte’s roadmap states: “Once an entity elects the fair value option, it may not revoke fair value accounting unless a new election date occurs.” It is also off the table for any instrument classified, even partly, in shareholders’ equity.

Why would anyone choose it? Netskope, the security software company, explained its reasoning in its 2025 S-1: “The primary reason for electing the fair value option is for simplification and cost-benefit considerations of accounting for the Convertible Notes at fair value versus bifurcation of the embedded derivatives.” Valuing one whole instrument can be simpler than valuing a host and a derivative separately. The price is volatility. Netskope’s filing says that when the notes’ fair value rises, “we recognize a loss on the change in fair value of Convertible Notes in our statement of operations for that period.”

What moves the number

Fair value for a private company’s note is a model output, not a market quote. Netskope said it had to remeasure its notes “on a quarterly basis using a complex valuation model,” with inputs that included the value and volatility of its common stock, time to expiration, credit spread and a Treasury-style benchmark interest rate.

Its explanation of one increase reads like a checklist of what founders can expect: “an increase in fair value of our common stock, growth in the principal balance due to the payment-in-kind feature of the Convertible Notes, and an increase in probability of an IPO assumption used in the valuation model.” Note the last item. Simply getting closer to a listing can raise the mark.

Holders run models too. Amazon, which holds Anthropic notes, lists among its valuation inputs “observable transactions such as new securities offerings” and “discounts for lack of marketability.” For a startup, that means each new priced round is evidence a valuer will use, on both sides of the note.

Questions to settle before your auditor raises them

None of these replace advice from your accountant, but working through them early avoids surprises at year-end:

  • How is the note classified? Liability or equity determines whether the fair value option is even available.
  • Should you elect the option at issuance? The choice is generally permanent, so decide before closing, not after the first audit.
  • Do any features need bifurcation if you don’t elect it? Discounts, caps, change-of-control payouts and similar terms should all be tested.
  • Who builds the valuation model, and how sensitive is it? Netskope disclosed that it “performed sensitivity analyses on the key inputs and assumptions used in determining the estimated fair value of Convertible Notes.”
  • How will you explain the charge to investors? If you plan to show an adjusted figure that strips it out, see our guide to non-GAAP metrics for startups.

When the notes convert

Conversion ends the remeasurement for the converted piece. PitchBook said Anthropic’s charge “should end for notes that convert to shares at the IPO, although conversion is subject to ownership limits.”

Those limits are concrete in Amazon’s case. On a listing, Amazon’s quarterly report says, “then-outstanding notes would be converted to nonvoting common stock, subject to our ownership cap.” A cap can leave part of a note unconverted, and that remaining piece could stay a liability on the books. Founders negotiating caps for strategic investors should know that a cap can also extend how long a note needs to be valued.

How big the swings can get

The 2025 numbers show the pattern before the IPO run-up. Of last year’s loss of about $42 billion, PitchBook attributed roughly $34 billion to marking the notes up, and warned that the headline loss therefore “does not measure cash burn.”

The first half of 2026 was larger still, and the holder’s marks give a sense of the speed. Ronen’s line to Forbes fits: “The charge is enormous precisely because the valuation soared.” Amazon’s books show it: in PitchBook’s tally, the retailer carried its Anthropic notes at $42.2 billion when the first quarter closed and at $97.9 billion when the second did, an increase of $55.7 billion.

Frequently Asked Questions

How do you account for a convertible note at fair value?

If the issuer elects the fair value option at issuance, the whole note is carried at fair value and remeasured every reporting period. Changes go through net income, except the part caused by the issuer’s own credit risk, which goes to other comprehensive income.

Why does a higher startup valuation create a loss on convertible notes?

A convertible note can become stock, so its value to the holder rises with the share price. The issuer owes that more valuable instrument, and when it is measured at fair value the increase in the liability is recorded as a loss.

Does a convertible note remeasurement loss cost the company cash?

No. It revalues a liability; nothing is paid out. That is why PitchBook cautioned that Anthropic’s 2025 bottom line is not a gauge of its burn rate.

Can a company switch off the fair value option later?

Generally not. Under the guidance Deloitte summarizes, once the fair value option is elected it cannot be revoked unless a new election date occurs.

Did Anthropic use the fair value option?

Unknown. Reporting on the confidential draft has not touched on the accounting election, so either the fair value option or a bifurcated conversion feature could produce the charge.

Sources

This article is general information for founders and is not accounting, legal or investment advice. How a financing instrument is accounted for depends on its exact terms; work through it with your accountant or auditor. Anthropic has not published its IPO prospectus; figures are as reported by the sources cited on the dates shown.