The Complete Guide to Convertible Notes for Founders
Convertible notes remain one of the most common ways to raise early-stage funding. Here's everything founders need to know.
What Is a Convertible Note?
A convertible note is a loan that converts to equity when certain conditions are met, typically when you raise a priced round.
Key characteristics:
- Starts as debt
- Converts to equity later
- Usually at a discount to the next round
- May include a valuation cap
Key Terms to Understand
Valuation Cap
The maximum valuation at which your note will convert. This protects early investors from dilution.
Discount Rate
A percentage discount to the next round's price, typically 15-25%.
Interest Rate
Annual interest that accrues on the note, typically 4-8%. Interest usually converts to equity.
Maturity Date
When the note comes due if no conversion has occurred, typically 18-24 months.
Cap vs. Discount
Notes typically have either a cap, a discount, or both. When both exist, the note converts at whichever gives the investor a better deal.
When to Use Convertible Notes
Good for:
- Very early stage (pre-revenue)
- Quick bridge rounds
- When valuation is hard to determine
- Rolling closes with multiple investors
Negotiating Tips
- Negotiate the cap - this is the key term
- Watch for aggressive caps
- Limit note total to avoid cap table problems
- Understand the math - model out scenarios
Use AngelBacked to find angel investors who commonly invest via convertible notes.