Convertible Note

A convertible note is a debt instrument that automatically converts into equity when a specific trigger event occurs — typically your next priced funding round. Instead of repaying the loan, the investor receives shares in your company. It was the standard way to raise early-stage capital before SAFEs came along, and it's still widely used.

Here's how it works: an investor lends your startup money, say $100K. The note has a maturity date (usually 18-24 months), an interest rate (typically 2-8%), a valuation cap, and often a discount rate. When you raise your Series A, the note converts. The investor gets shares at a price determined by either the valuation cap or the discount — whichever gives them a lower (better) price per share. The accrued interest also converts into equity.

The key difference between a convertible note and a SAFE is that a convertible note is technically debt. It has a maturity date and accrues interest. If the note reaches maturity without a conversion trigger, you theoretically owe the money back (though in practice, notes are usually extended or renegotiated). SAFEs eliminated this complexity by removing the debt wrapper entirely. Still, convertible notes remain popular in certain markets and with certain investor types, particularly outside Silicon Valley.

Convertible notes let you raise money quickly without negotiating a full valuation, which is hard to do accurately at the earliest stages. They're faster and cheaper than a priced round — legal fees might be $2K-5K versus $25K+ for a Series A. However, the debt structure means you have a maturity date looming, and multiple notes with different terms can create cap table complexity. Understanding how notes work protects you from unfavorable conversion terms and helps you choose between notes and SAFEs for your raise.