Convertible Note
A short-term debt instrument that converts into equity at a future funding round.
Definition
A convertible note is a form of short-term debt that converts into equity when a startup raises a priced funding round. Unlike a SAFE, a convertible note accrues interest and has a maturity date — if the company has not raised a qualifying round by then, the note may be repayable as cash. Key terms include the interest rate (typically 4–8%), maturity date (12–24 months), valuation cap, and discount rate.
Why It Matters
Convertible notes were the standard pre-seed instrument before SAFEs became popular. They remain common when investors prefer the legal familiarity of debt instruments or in markets outside the US. Understanding note terms is critical: accumulated interest increases the principal that converts, and a missed maturity date can create significant founder liability.
Example
A $150,000 convertible note at 6% interest with a $4M cap. After 18 months, $13,500 of interest accrues, making the total converting amount $163,500 — all at the capped conversion price.