A convertible note is a loan that can turn into equity when a startup completes a future priced funding round. Before you agree to one, understand how its conversion terms, interest and maturity date could affect your company.
How does a convertible note work?
With a convertible note, an investor provides funding as a loan rather than setting the share price at the time of investment. The loan is intended to convert into shares during a later priced round. Until conversion, the balance accrues interest.
Convertible notes commonly include an interest rate of 4 to 8 percent and a maturity date of 18 to 24 months. They also usually include a valuation cap, a discount, or both. These terms affect the amount of equity an investor may receive when the note converts.
Notes are still used for bridge rounds and in some deals outside the US. An investor may favor the familiar debt structure, or notes may be more common in the market where you are fundraising. That makes it important to understand the loan terms as well as the future equity implications.
How is a convertible note different from a SAFE?
Both instruments let a company raise capital before agreeing on a share price in a priced round. Their central distinction is that a convertible note is debt, while a SAFE is an agreement for future equity rather than a loan.
| Feature | Convertible note | SAFE |
|---|---|---|
| Structure | Loan that can convert into equity | Agreement for equity in the future |
| Interest | Accrues interest | No interest |
| Maturity date | Has a maturity date | No maturity date |
| Repayment risk | Technically may be called or repayable | Cannot be called |
A note therefore brings obligations that a SAFE does not. Its maturity date can become relevant if the expected priced round takes longer than planned. A SAFE is simpler on these points, and is generally considered more founder-friendly. Many US angels and seed funds are comfortable with SAFEs, while some investors, particularly outside Silicon Valley or internationally, may prefer notes.
The instrument alone does not determine whether a deal is favorable. The financial terms matter: a low valuation cap on a SAFE, for example, can be less attractive to a founder than a note with fair terms. Compare the full agreements and consider getting legal advice before signing.
Which convertible note terms should you review?
Valuation cap and discount
A valuation cap sets a ceiling on the valuation used to calculate the price at which the note converts. A discount gives the investor a percentage off the price paid by investors in the next round. Both can affect how much ownership the early investor receives.
Look at these provisions alongside one another and model their effect on your company’s ownership. The cap and discount are key negotiation points, not just details to leave for later.
Interest rate
Interest increases the balance that may convert into shares. It can reward an investor for taking an early risk, but it also means the amount converting can grow over time. Account for that increase when you assess the note’s possible effect on ownership.
Maturity date
The maturity date marks when the loan reaches its stated deadline. If the company has not completed a priced round by then, the note may be technically in default. That can weaken your position when negotiating with noteholders.
Consider whether the timeline gives your company a realistic opportunity to reach a priced round. Do not treat the date as a formality or assume that conversion will happen before it becomes relevant.
What happens if no priced round occurs?
If the note reaches maturity without a priced round, it is technically repayable. In practice, holders may agree to extend it, convert it at a negotiated valuation or discuss another resolution. Review whether the document allows room to negotiate if the expected financing is delayed.
When might a founder choose a convertible note?
For many early US pre-seed and seed raises, a SAFE may be the simpler choice. A convertible note can make sense if an investor specifically wants a debt instrument, or if you are raising in a market where notes are familiar. The right choice depends on the investor’s requirements, the local fundraising context and the agreement’s terms.
Before deciding, consider how the note’s interest and maturity date fit your fundraising plan. Also check how it will work alongside any other instruments you have issued. A startup can have both notes and SAFEs from different investors, but having multiple instruments can add complexity when they convert. Founders often choose one instrument for a round to keep administration clearer.
Common errors include overlooking the maturity deadline, failing to account for future shares on the cap table, and focusing on the instrument label instead of negotiating the cap and discount. If an investor’s preference could help secure funding, weigh that against the extra obligations a note creates. Have a lawyer prepare or review the agreement so its written terms reflect what you intend.
How can you find investors for a convertible note?
The terms of a financing instrument matter, but you also need investors whose stage, sector, geography and check size fit your startup. Round Funded covers 60,000+ active VCs, angels, family offices and accelerators, searchable using those criteria. Investors are filtered for recent activity, with a check in roughly the last 6 months, and their emails are verified.
Round Funded helps founders find investors, send pitches and track replies. Its AI can draft personalized outreach emails and follow-ups for each investor. Messages go from the founder’s own Gmail, so replies arrive in the founder’s inbox and the email thread belongs to the founder.
The product also includes a fundraising pipeline to keep investors, stages and next steps together. Every plan includes a Data Room that founders can build and share through one link, with a deck, traction, team information and an ask. For founders preparing to approach investors, you can submit your startup on Round Funded and get matched with investors.
How Round Funded helps you approach investors
- Submit your startup on Round Funded to get matched with investors.
- Search investors by stage, industry, geography and check size.
- Use AI to draft personalized outreach emails and follow-ups for investors.
- Track investors, fundraising stages and next steps in the pipeline.
- Build and share a Data Room link with your deck, traction, team and ask.
Frequently Asked Questions
Is a convertible note a loan or equity?
It begins as a loan and is intended to convert into equity at a future priced round. Until conversion, it accrues interest and has a maturity date.
What happens when a convertible note reaches maturity?
If no priced round has taken place by maturity, the note is technically repayable. Holders may agree to extend it, convert it at an agreed valuation or negotiate another outcome.
Do convertible notes usually include a valuation cap?
They usually include a valuation cap, a discount, or both. A cap sets a ceiling for the valuation used in conversion, while a discount reduces the price relative to the next round.
Should a startup use a note instead of a SAFE?
A SAFE is a common choice for early US pre-seed and seed rounds. A note may suit a situation where an investor prefers debt or notes are familiar in the market where you are raising.
Can a startup issue both notes and SAFEs?
Yes, a startup can have both from different investors. However, multiple instruments can make conversion more complicated, so founders often use one instrument per round.