When should I use a convertible note instead of a SAFE?

Convertible notes are preferred in markets where SAFEs are uncommon (parts of Europe, Asia), by investors who want the security of a debt instrument, or when the maturity date serves as a useful forcing function to raise a priced round. SAFEs are simpler, cheaper to execute, and standard in the US startup ecosystem.

What happens when a convertible note matures?

Technically, the investor can demand repayment of principal plus accrued interest. In practice, most investors extend the maturity date rather than forcing repayment, since demanding cash back from a startup rarely ends well for either party. However, maturity creates leverage for renegotiation of terms.

How does interest work on a convertible note?

Interest accrues on the principal balance (typically 2-8% annually) and is not paid in cash. Instead, the accrued interest converts to additional equity at the conversion event. For example, a $200k note at 5% interest held for 12 months converts $210k worth of equity, not $200k.

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GLOSSARY

Convertible note

A convertible note is a short-term debt instrument that converts into equity when a qualifying event occurs, typically a priced funding round. Unlike SAFEs, convertible notes accrue interest (usually 2-8% annually) and have a maturity date (typically 18-24 months). The note converts at the lower of the valuation cap price or a discounted price per share at the next round. If maturity is reached without conversion, the note is technically repayable, though in practice maturity is usually extended.

Why it matters

Convertible notes are debt instruments that convert to equity at a future priced round. They were the standard early-stage instrument before SAFEs.

Still common in certain geographies, with angel investors who prefer debt protection, and when founders want the maturity date as a forcing function.

Key terms

Valuation cap and discount work the same as SAFEs. The investor converts at whichever gives them a better price.

Interest rate: typically 2-8% annual, accrues and converts to additional equity at conversion.

Maturity date: deadline (usually 18-24 months) by which the note must convert or be repaid. In practice, maturity is often extended rather than enforced.

SAFE vs convertible note

SAFEs: no interest, no maturity, simpler docs, standard terms (YC template). Preferred for speed and simplicity.

Notes: interest accrual, maturity date, more negotiation points, some legal protections as debt. Preferred in some markets and by some angels.

Worked example

$200k note, $4M cap, 20% discount, 5% interest, 18-month maturity. After 12 months, Series A at $8M pre-money.

Accrued interest: $200k x 5% x 1 year = $10k. Total converting: $210k. Cap price: $4M / shares. Discount price: $8M x 80% / shares. Investor gets whichever is lower (more shares).

Common pitfalls

Hitting maturity without a priced round. Technically, the investor can demand repayment, though most extend.

Stacking notes with different terms makes conversion math complex. Keep a running cap table model.

Forgetting that accrued interest increases the conversion amount and therefore dilution.

How to show in your deck

Ask slide: specify instrument, cap, discount, and target raise. Investors familiar with your market will expect the right instrument.

Formulas

Conversion amount

Principal + Accrued interest

Converts at the lower of cap price or discounted price per share.

Frequently asked questions

Related terms

SAFE Valuation cap Priced round

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SAFE (Simple Agreement for Future Equity)Pre-money valuation