Convertible Note
A short-term loan that converts into equity at a future financing round, typically with a discount and/or valuation cap.
A convertible note is a debt instrument that converts into equity when a startup raises a subsequent priced round. Unlike a SAFE, convertible notes carry an interest rate (typically 2-8%) and a maturity date (usually 18-24 months). If the startup fails to raise a priced round before maturity, the investor can theoretically demand repayment, though this rarely happens in practice.
Convertible notes were the standard early-stage instrument before SAFEs gained popularity. They typically include a valuation cap (the maximum valuation at which the note converts) and a discount rate (usually 15-25% off the next round's price). These provisions reward early investors for taking on more risk.
While SAFEs have largely replaced convertible notes in Silicon Valley, notes remain common in other ecosystems, particularly where investors want the legal protections of debt. The accrued interest on a convertible note also converts into additional equity, giving investors slightly more ownership than a comparable SAFE.
Example
An angel invests $100K via a convertible note with a $4M cap, 20% discount, 5% interest, and 18-month maturity. After 12 months, the startup raises a Series A at $10M pre-money. The note converts at the $4M cap (better than the 20% discount on $10M = $8M). The $5K in accrued interest also converts, so the investor gets equity for $105K at the $4M valuation.
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