# Convertible Note

## Quick Definition
A debt instrument that converts to equity in a future funding round, featuring interest accrual and a maturity date.

## What is a Convertible Note?
A convertible note is a loan that converts to equity in a future funding round. Unlike SAFEs, convertible notes are debt instruments with interest rates and maturity dates. If conversion doesn't happen by maturity, the note becomes due.

Convertible notes were the standard early-stage instrument before SAFEs gained popularity. They're still common, especially with angel investors and in certain geographies.

## Key Convertible Note Terms
- **Principal:** The investment amount.  
- **Interest Rate:** Annual interest that accrues and converts with principal.  
- **Maturity Date:** When the note comes due if not converted.  
- **Valuation Cap:** Maximum conversion valuation.  
- **Discount:** Percentage reduction from Series A price.

## Conversion Triggers
Notes typically convert upon a "qualified financing" (usually defined as raising above a threshold, like $1M). If conversion doesn't happen by maturity, the company must repay or renegotiate.

## Notes vs SAFEs
- Notes are debt with maturity risk.  
- SAFEs have no maturity.  
- Notes accrue interest.  
- SAFEs don't.  
- Notes may be preferred by investors wanting more protection.  
- SAFEs are simpler and more founder-friendly.

### Formula
- **Amount at Conversion = Principal + Accrued Interest**  
- **Conversion Price = Lower of (Cap Price) or (Qualified Price × (1 - Discount))**

### Example
$250K convertible note terms:
- Interest rate: 6% annual  
- Maturity: 24 months  
- Valuation cap: $4M  
- Discount: 20%

After 18 months, Series A at $8M pre-money:
- Principal + interest = $250K + $22.5K = $272.5K  
- Converts at $4M cap (better than $8M × 0.8 = $6.4M)  
- Ownership = $272.5K ÷ $4M = 6.8%

## Related Terms
- **SAFE (Simple Agreement for Future Equity)**  
  An investment agreement that converts to equity in a future funding round, featuring a valuation cap and/or discount without debt terms.  
  [Learn more](/content/terms/safe-simple-agreement-future-equity/index.html)

- **Valuation Cap**  
  The maximum valuation at which a SAFE or convertible note converts to equity, protecting early investors from excessive dilution.  
  [Learn more](/content/terms/valuation-cap/index.html)

- **Discount Rate (SAFE/Note)**  
  A percentage reduction on the next round's share price for SAFE or convertible note holders, rewarding early risk.  
  [Learn more](/content/terms/discount-rate-safe/index.html)

## Learn More About Convertible Note
- **SAFEs and Form D: The Fundraising Paperwork Founders Get Wrong**  
  When to raise on a SAFE, when you have to file a Form D, and the 506(b) vs 506(c) decision that quietly shapes who you can talk to about your round.  
  [Read article](/content/blog/safes-and-form-d-fundraising-paperwork-founders-get-wrong/index.html)

- **The Finance Stack for Founders Who Want to Stay Lean**  
  Most early-stage founders build their finance stack reactively. A consolidated, AI-native platform compounds across workflows instead of trapping insight inside silos.  
  [Read article](/content/blog/finance-stack-for-founders-who-want-to-stay-lean/index.html)

- **How Venture Capitalists Actually Work: A Founder's Guide to the VC Process**  
  A founder's guide to how venture capital actually works, from fund structure and the investment process to due diligence and pitching VCs effectively.  
  [Read article](/content/blog/venture-capital-fundraising-process-founders-guide/index.html)