Convertible note

A loan that converts into equity at a future priced round, usually with a discount and a valuation cap. Unlike a SAFE it carries interest and a maturity date.

Example

$200,000 at 5% interest, a 20% discount and a $6M cap, maturing in 24 months.

Important

The maturity date is real. If no round happens before it, the note is technically repayable — which a startup usually cannot do.

Related terms

• SAFE — Simple Agreement for Future Equity — an investor gives money now in exchange for shares later, when a priced round happens. It is not a loan and has no interest or maturity date.
• Valuation cap — The maximum valuation at which a SAFE or note converts, regardless of what the priced round is actually done at.
• Discount (on a SAFE or note) — A percentage reduction on the priced round's share price, rewarding the investor for coming in earlier.
• Priced round — A funding round where the share price is actually agreed, shares are issued immediately and a valuation is set.

Lessons that explain it

• SAFEs and convertible notes — How most first money is raised now — fast, cheap, and much easier to get wrong than founders expect. (15 min)

All 176 terms in the Founder glossary