Convertible note

How it works

Convertible notes were the dominant pre-seed instrument before SAFEs (~2013). Unlike a SAFE, a convertible note is technically debt — it accrues interest and has a maturity date, after which the company owes the principal back. Most notes include a valuation cap and a discount, and convert automatically at the next priced round. They've fallen out of favour for founders because the debt nature creates legal complexity if the conversion event doesn't happen on time.

Related terms

• SAFE (Simple Agreement for Future Equity)
  A SAFE is a short investment contract that gives an investor the right to receive shares in a future priced round, without setting a valuation today.
• Valuation cap
  A valuation cap is the maximum valuation at which an early investment (SAFE or convertible note) will convert into equity, protecting the investor from being diluted if the company's valuation skyrockets.
• Term sheet
  A term sheet is a non-binding document outlining the key terms of a proposed investment — valuation, amount, board seats, liquidation preference, anti-dilution, and other rights.