Convertible Note
A debt instrument that converts to equity at a future funding round, with interest and a maturity date.
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Definition
A convertible note is a short-term debt instrument that converts to equity, usually preferred stock, upon a future triggering event like a priced equity round. Unlike SAFEs, convertible notes are technically loans with interest rates (typically 2-8%), maturity dates (12-24 months), and conversion terms.
Convertible notes were the standard pre-seed/seed instrument before SAFEs gained popularity. They remain common in certain geographies and situations, particularly when investors want the additional protections of debt (priority in liquidation, interest accrual, maturity pressure).
Key terms include: interest rate, maturity date, valuation cap, conversion discount, and qualified financing threshold (minimum round size to trigger automatic conversion).
Why It Matters for Founders
Convertible notes provide a middle ground between SAFEs and priced rounds. They are simpler than priced rounds but offer investors more protection than SAFEs through interest accrual and maturity dates.
The maturity date is a key consideration — if the startup hasn't raised a qualifying round by maturity, the investor can technically demand repayment. In practice, most maturity events are renegotiated, but they can create pressure and distraction.
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Formula
Conversion amount = Principal + Accrued Interest, converted at cap or discount priceReal-World Example
An investor lends $200K via convertible note at 5% annual interest, $8M cap, 2-year maturity. After 18 months, Series A triggers conversion. The $215K (principal + interest) converts at the $8M cap.
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Frequently Asked Questions
What is a convertible note?+
Convertible note vs. SAFE?+
What is a typical convertible note interest rate?+
What happens at maturity?+
When should you use a convertible note?+
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