LEGAL
Raising Capital
Convertible Notes: What They Are and How They Work
Convertible notes are loans that convert into equity later, typically with interest and a valuation cap. They are similar to SAFEs but legally structured as debt and may include a maturity date and interest accrual.
Why it Matters
A convertible note is a debt instrument that converts into equity later — typically during your first priced round.
It’s an older cousin of the SAFE and still used when interest, maturity dates, or legal precedent matter.
Founders Checklist
Work with counsel to draft or review the note agreement
Define a valuation cap, discount, or both (if applicable)
Set a maturity date and interest rate (typically 6–8% interest, 18–24 months)
Track all convertible notes in your cap table system
Include key terms in your investor updates and data room
Founder Fails
Let convertible notes mature without converting or extending
Accrued large interest balances unknowingly
Used inconsistent terms across notes > legal complexity during Series A
When to ask for Help
If you’re deciding between a SAFE and a convertible note
Before accepting terms with a maturity date or high interest rate
If investors request special rights or covenants
When issuing convertible notes in multiple rounds
To understand repayment obligations if you don’t raise a priced round
Frequently Asked Questions
Q: What is a convertible note?
A: A loan to the company that converts into equity later, often at a discount or valuation cap. It starts as debt, then becomes stock.
Q: Why do some investors prefer notes over SAFEs?
A: Convertible notes accrue interest, have maturity dates, and are seen as more enforceable. Some institutional investors prefer them in later seed stages.
Q: What happens at maturity?
A: If the note hasn’t converted by the maturity date, the company typically:
Extends the term
Forces a conversion
Or repays (rare)
Q: Can I mix SAFEs and notes in the same round?
A: You can, but it complicates the cap table. Ideally, keep each round consistent — all SAFEs or all notes.