Convertible Note

A short-term debt instrument that converts into equity at a future financing round, carrying interest and a maturity date, unlike a SAFE.

Example

A 50,000 convertible note accrues interest until the next round, at which point the principal plus accrued interest converts into shares at the note's cap or discount price.

Important

Being technically debt rarely helps in practice - a company that fails before converting the note usually has no cash left to repay it.

Related terms

• SAFE (Simple Agreement for Future Equity) — A contract that gives an investor the right to receive shares in the future, at a price set by a formula, rather than issuing shares immediately. It is not debt and carries no interest or maturity date.
• Valuation Cap — The maximum company valuation a SAFE or convertible note's conversion price can be based on, protecting the early investor from paying a later round's higher price.
• Creditor — Someone who has lent money and is owed repayment, ranked ahead of equity holders if the borrower runs into trouble.

Lessons that explain it

• What the cap table tells you that the founders did not — A cap table reveals founder motivation, past decisions and future obstacles. Low founder ownership, dead equity, unconverted instruments and messy structures are signals worth reading before investing. (10 min)
• Ask what the bridge is a bridge to — A bridge round is short-term funding to reach a milestone or a larger round. Whether it is a sign of strength or of trouble depends on what specifically it is meant to reach, and whether anyone new is willing to fund it. (11 min)
• A convertible note is a loan that usually becomes shares, at the better of two prices — A convertible note is debt that converts into equity at a future round, typically at the lower of a discounted price or a capped price, with interest added to the amount converting. (12 min)
• Convertibles trade speed and low cost for an unsettled price — SAFEs and notes close quickly and cheaply but defer the valuation and the governance. Priced rounds cost more and take longer, and they settle ownership, rights and price now. (11 min)
• A SAFE is a promise of a share, not a share — Most angel checks do not buy stock on the day they are written. They buy a contractual right to receive stock later, at a price a formula computes - and almost nobody reads the formula closely enough to know what it will say. (10 min)

All 578 terms in the Investing glossary