What Is a Convertible Note?
A convertible note is short-term debt that investors lend to a startup, which converts into equity at a later round instead of being repaid in cash.
How it works
An investor lends money to the company with the expectation that the loan will convert into shares when the next priced round happens. Until then, it is debt: it typically earns interest, which is added to the amount that converts, and it has a maturity date, often 12 to 24 months out. Terms vary by deal.
Key terms include a valuation cap, a discount to the next round's price, the interest rate, and what happens at maturity. If no round occurs by then, the company might have to repay, extend the date, or negotiate a conversion. Notes avoid setting a valuation today, which saves time when it is hard to value a young company.
Convertible note vs SAFE
The key difference is debt. A note has interest and a deadline, so investors have a legal claim that can be enforced if the date passes. A SAFE has neither. Notes can also be more complex to paper, and some states and lenders treat them differently. Many early investors still prefer notes for the added protection.
Example
For example, an investor lends $100,000 on a note with 6 percent annual interest and a 20 percent discount. After one year, the balance is $106,000. At the next round, new investors pay $1.00 per share, so the note converts at $0.80, giving the noteholder 132,500 shares ($106,000 divided by $0.80). The interest increased the ownership the founders give up.
Common mistakes
- Forgetting that interest adds to the amount converting.
- Ignoring the maturity date until it arrives.
- Issuing many notes with different terms, which complicates conversion.
- Not asking a lawyer how state lending or securities rules apply.
Frequently asked questions
What is a convertible note?
It is a short-term loan from an investor that converts into company shares at a later financing, usually with a discount or valuation cap. It typically accrues interest and has a maturity date.
What happens if a convertible note matures before a funding round?
It depends on the note's terms. The company may have to repay, the parties may extend the date, or the note may convert at an agreed price. Check the maturity clause and ask a lawyer before it arrives.
Related terms
Go deeper
- SAFE vs Convertible Note: Which Is Better for Founders? GuideSAFE vs convertible note explained: how each works, valuation caps, discounts, interest and maturity, with a worked example and the trade-offs for founders.
- Startup Funding Stages: Pre-Seed to Series C Explained GuideStartup funding stages explained in plain English: pre-seed, seed and Series A, B and C, what each round is for, what investors expect and how rounds are sized.
All 70 startup terms · More terms starting with C · Guides
General information, not legal, tax or financial advice. Reviewed 11 November 2026.