Deal Terms
Convertible Note
A short-term debt instrument that converts to equity at a future priced round, with an interest rate and maturity date.
A convertible note is a loan that automatically converts into equity when the startup raises a qualifying priced round (typically a Series A). Key terms: interest rate (usually 5-8% per year, accruing and adding to principal), maturity date (usually 18-24 months), valuation cap (maximum valuation at which the note converts), and discount rate (typically 15-20%, reducing the effective conversion price to reward early risk). Convertible notes predated SAFEs and are still common outside of Silicon Valley. Unlike SAFEs, they carry debt obligations — if the company fails before conversion, investors theoretically have a debt claim. In practice, this matters little because failed startups rarely have assets.