A convertible note is a loan that automatically converts into equity shares when the company raises a subsequent qualifying round of financing. Before SAFEs gained dominance, convertible notes were the standard instrument for early-stage startup investing.
Key terms of a convertible note
- Principal — the amount invested
- Interest rate — typically 4–8% annually, which accrues and converts into additional shares (not paid in cash)
- Maturity date — usually 18–24 months from issuance, the deadline by which the note must convert or be repaid
- Valuation cap — the maximum valuation at which the note converts into equity
- Discount rate — typically 15–25%, applied to the price per share in the qualifying round
Example conversion
An angel invests $100K via a convertible note with a 6% interest rate, $8M valuation cap, and 20% discount. After 12 months, the startup raises a Series Seed at a $12M pre-money valuation. The note has accrued $6,000 in interest, so $106,000 converts. The investor gets shares at whichever is more favorable: the $8M cap price or a 20% discount to the $12M round price ($9.6M). The $8M cap wins, so the investor converts at the $8M effective valuation.
Convertible notes vs. SAFEs
| Feature | Convertible Note | SAFE |
|---|---|---|
| Debt instrument | Yes | No |
| Interest | Yes (4–8%) | None |
| Maturity date | Yes (18–24 months) | None |
| Legal cost | $5K–$15K | $0–$2K |
When to use a convertible note
Convertible notes are still preferred in certain situations:
- International investors who are more familiar with debt structures
- Founder leverage at maturity — the maturity date can force a conversion negotiation
- Bridge rounds between priced rounds, where existing investors extend short-term capital
In 2026, roughly 60–70% of US pre-seed and seed deals use SAFEs, with convertible notes accounting for most of the remainder.