Securities & instruments
What is Convertible Note?
Short-term debt that converts into preferred stock at the next priced round - with interest, maturity date, and conversion terms.
A convertible note is debt that converts into equity. Unlike a SAFE, a note accrues interest (typically 4-8% annually) and has a maturity date (typically 18-24 months) - meaning if no priced round happens before maturity, the note technically becomes due. In practice, notes either convert at the next priced round (cap or discount), get extended, or convert via a maturity-based mechanism. Modern startups have largely moved to SAFEs because they're simpler and don't carry debt-like risk.
Example
- $1M convertible note, 5% interest, $10M cap, 20% discount, 24-month maturity. At a Series A 12 months later at $25M pre, the cap path converts $1.05M (principal + accrued interest) at $10M post - giving the noteholder ~10% of the company.