Convertible Note
A loan that converts to equity at the next funding round, with interest and a maturity date.
Definition
A convertible note is a form of short-term debt that converts into equity at a future funding round. Unlike SAFEs, convertible notes accrue interest (typically 2-8% annually) and have a maturity date (typically 12-24 months). If the note has not converted by maturity, the investor can demand repayment or negotiate conversion terms. Notes typically include a valuation cap and/or discount rate.
Why it matters
Convertible notes accrue interest, which converts to additional shares, creating more dilution than a SAFE at the same cap. If the company struggles to raise a priced round before maturity, the note can become a crisis, potentially forcing a fire sale or harsh renegotiation.
Example
An investor lends $500K via a convertible note at 5% interest, $8M cap, 20% discount, and 18-month maturity. After 12 months, $525K (principal + interest) converts at the Series A. The investor gets shares at either the cap price or a 20% discount, whichever is better.