Convertible notes: debt that wants to become equity.
A convertible note is a loan that is meant to turn into shares at your next priced round. It has the cap and discount of a SAFE, plus interest and a due date.
The short answer
A note is debt. It accrues interest and has a maturity date. When you raise a priced round, the principal plus interest usually converts into shares at the cap or discount price. If no round happens before maturity, you need to extend, convert or repay.
Convertible note · Debt with a due date
- Sign the note
- Interest accrues
- Priced round
- Converts with interest
SAFE · No interest, no due date
- Sign the SAFE
- No interest
- Priced round
- Converts
Compare the options
Legal form
Convertible note: Debt
SAFE: Not debt; a right to future shares
Interest
Convertible note: Yes; usually converts into shares
SAFE: No
Maturity date
Convertible note: Yes
SAFE: No
Cap and discount
Convertible note: Common
SAFE: Common
If no round happens
Convertible note: Extend, convert or repay at maturity
SAFE: Stays outstanding until a trigger event
Paperwork
Convertible note: Short, but more negotiated
SAFE: Standard template
How a note converts
Say an angel lends $500K on a note with a cap and 6% simple interest. After a year, the note holds about $530K. At your priced round, that full amount converts at the lower of the cap price or the discounted round price. Interest is paid in shares, not cash, so it adds a little dilution.
Watch the maturity date
Because a note is debt, the investor could in theory ask for repayment at maturity. In practice most investors extend or convert, but it gives them leverage if your round runs late. Read what the note says happens at maturity before you sign.
- What is the interest rate, and does it convert into shares?
- When is maturity, and what happens then?
- Is there a cap, a discount, or both?
- What counts as a qualified financing that triggers conversion?
Terms to know
Principal
The amount the investor lent.
Maturity date
The date the note comes due if it has not converted.
Qualified financing
A priced round large enough to trigger automatic conversion.
Will your deck get you to a priced round before maturity?
A note buys time until your next round. Upload your deck and we tell you whether the story is strong enough to close that round on schedule.
Questions founders ask
Why would anyone use a note instead of a SAFE?
Some investors prefer the protections of debt, and notes remain common in some regions and with some investor types. Notes can also suit bridge rounds between priced rounds.
Can a note be repaid in cash?
It can, at maturity or on a sale of the company, depending on its terms. Most notes are written expecting conversion, so check your exact terms with a lawyer.
Sources
Sources: standard US convertible note practice; YC post-money SAFE user guide for comparison. Not legal or financial advice.
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