Convertible Note
A short-term loan that converts into equity at a future financing round, carrying interest and a maturity date.
A convertible note is a debt instrument: the company owes the investor the principal plus accrued interest until the note converts into equity, usually at the next priced round, or is repaid. Because it is legally debt, it appears as a liability on the balance sheet and gives the noteholder creditor rights if the company winds down.
Notes almost always carry a valuation cap and/or discount rate, functioning similarly to a SAFE in how conversion price is set, but they add two features SAFEs dropped: an interest rate (commonly 4-8% annually, accruing as more shares at conversion) and a maturity date (commonly 18-24 months) at which the note technically comes due if no round has happened.
When a note matures without a conversion event, the company and investor have to renegotiate — extend the maturity, convert at the cap regardless of a priced round, or in rare cases the investor demands repayment, which most cash-strapped startups cannot make.
A $500,000 note at a $6M cap with a 20% discount and 6% interest sits for 14 months before a Series A priced at $12M pre-money. Accrued interest adds about $35,000 to principal, and the note converts at the lower of the cap-implied price or the discounted round price.
Founders should push for a longer maturity (24 months) and track accruing interest as real dilution, not a rounding error — on a note held two years at 6%, interest alone can add over 10% more shares to the investor's position.
What happens if a convertible note hits maturity?
The company and investor renegotiate: extend the maturity date, force conversion at the cap, or occasionally repay the note in cash — outright repayment is rare because most startups don't have the cash.
Convertible note vs SAFE — which do investors prefer?
Sophisticated seed investors are largely indifferent and default to whichever the company offers; SAFEs dominate US seed rounds today because they're simpler and faster to close, but notes are still common in bridge financings and outside the US.
Related terms
Run the numbers yourself: dilution, SAFE conversion, and fund-returner calculators.