Funding & Investment
Convertible Note
Also Known As
Convertible DebtNote
A convertible note is a form of short-term debt that converts into equity (usually preferred stock) at a future financing round, typically at a discounted price relative to new investors.
What is a Convertible Note?
Convertible notes let startups raise money quickly without setting a valuation. The investment starts as a loan but converts to equity when the company raises a "priced round."
Convertible Note Terms
- Principal: Amount invested
- Interest: Accrues until conversion (typically 2-8%)
- Discount: Reduction from next round price (15-25%)
- Valuation Cap: Maximum valuation for conversion
- Maturity Date: When note is due if not converted
Conversion Example
Note: $100K at 20% discount, $5M cap Series A: $10M pre-money valuation
Conversion price is the better of:
- Discount: $10M × 80% = $8M effective valuation
- Cap: $5M valuation
Note converts at $5M (cap), getting more equity.
Notes vs SAFEs
| Aspect | Convertible Note | SAFE |
|---|---|---|
| Type | Debt | Equity instrument |
| Interest | Yes | No |
| Maturity | Yes | No |
| Complexity | Higher | Lower |
| Legal Cost | Higher | Lower |
Example Usage
“They raised $500K on convertible notes with a $6M cap to bridge to their seed round.”