Also known as Convertible debt
A convertible note is a short-term loan that converts into equity at a future priced round instead of being repaid in cash.
Key takeaways
A convertible note is a short-term loan that converts into equity at a future priced round instead of being repaid in cash. Unlike a SAFE, it's actual debt: it accrues interest and has a maturity date, and it typically carries a valuation cap and/or a conversion discount.
An investor lends $500k on a note at 5% interest with a $10M cap and 20% discount. At the priced round, principal plus ~$50k of accrued interest converts to equity at whichever of the cap or discount gives them more shares.
Convertible note interest is usually 5–8% annually, with maturity typically 18–24 months and conversion discounts commonly around 20%.
Source: Carta (2024)
Because a convertible note is debt, its interest quietly increases dilution over time, and its maturity date can force a conversion, extension, or repayment if you don't raise in time, a real cash risk a SAFE doesn't carry.