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 (usually accruing and paid as more shares at conversion) and a maturity date 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.
The note's debt features are why it survives in two niches: bridge financings, where existing investors want the discipline of a maturity date, and markets outside the US, where SAFE-style documents are less established. Founders sometimes treat notes as SAFEs with extra paperwork, but interest really does convert into additional shares, and maturity really does create a renegotiation point.
Accept a short maturity at your peril. A note that matures shortly after your planned round leaves no buffer for a delayed fundraise, and the leverage shift at maturity is real. Stacking several notes at different caps months apart also creates a conversion waterfall that surprises everyone at the priced round — if you must bridge twice, keep terms consistent.
Because it is debt, a note ranks ahead of equity if the company winds down, which is part of the downside protection investors are buying relative to a SAFE.
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.
When should a founder choose a convertible note over a SAFE?
When investors require it (common in insider-led bridges), when operating in a market where notes are the local standard, or when the company actually wants the forcing function of a maturity date. For a standard US pre-seed or seed round, a post-money SAFE is usually simpler.
Does the interest rate on a convertible note matter?
More than founders expect. Interest usually accrues into principal that converts into shares at the same cap or discount, so it's dilution, not just cost. Negotiate the rate and the maturity together.
Related terms
Run the numbers yourself: dilution, SAFE conversion, and fund-returner calculators.