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 to 8 percent annually, and have a maturity date, typically 18 to 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.
By Pitchkit · Last Updated October 10, 2026
Convertible notes are debt instruments that convert to equity at a future priced round. They were the standard early-stage instrument before SAFEs and are still common in certain geographies, with angel investors who prefer debt protection, and when founders want the maturity date as a forcing function to raise a priced round.
Valuation cap and discount work the same way as in a SAFE. The investor converts at whichever gives them a better price per share.
Interest rate typically runs 2 to 8 percent annually, accrues over time, and converts into additional equity at the conversion event rather than being paid in cash.
Maturity date is the deadline, usually 18 to 24 months, by which the note must convert or be repaid. In practice, maturity is often extended rather than enforced.
SAFEs carry no interest and no maturity date, use simpler standard documents based on the YC template, and are preferred for speed and simplicity.
Convertible notes accrue interest, carry a maturity date, involve more negotiation points, and offer some legal protections as debt. They are preferred in some markets and by some angel investors.
A $200,000 note carries a $4 million cap, 20 percent discount, 5 percent interest, and 18-month maturity. After 12 months, the company raises a Series A at $8 million pre-money.
Accrued interest equals $200,000 times 5 percent times one year, or $10,000, so total converting value is $210,000. The cap price is based on $4 million divided by outstanding shares. The discount price is based on $8 million times 80 percent divided by outstanding shares. The investor gets whichever price gives them more shares.
Hitting maturity without a priced round in sight. Technically, the investor can demand repayment, though most choose to extend instead.
Stacking multiple notes with different terms, which makes conversion math complex. Keep a running cap table model updated as new notes come in.
Forgetting that accrued interest increases the conversion amount and therefore increases dilution beyond the original principal.
On your ask slide, specify the instrument, cap, discount, and target raise. Investors familiar with your market will expect the instrument that is standard there, so match local convention where it differs from the US default.
Notes accrue interest, typically 2 to 8 percent a year, and the interest adds to the principal at conversion. A $100,000 note at 5 percent for 18 months converts as roughly $107,500 of equity.
The maturity date is usually 18 to 24 months out. A short maturity creates pressure to raise; a longer one gives more runway. Negotiate for at least 18 months.
If no priced round has happened by the maturity date, the most common outcome is an extension, often with slightly better terms for the investor. The note can also convert at the cap without a new round, depending on its terms.
Repayment demands are rare and usually a negotiating tactic. Know exactly what your note says happens at maturity before you sign; automatic conversion at the cap is the founder-friendly version.
SAFE: no interest, no maturity date, simple, closes in 1 to 2 weeks, best for pre-seed and seed. Convertible note: 2 to 8 percent interest, 18 to 24 month maturity, moderate complexity, closes in 2 to 4 weeks, used at seed when investors prefer debt.
Use a SAFE unless an investor specifically requires a note. SAFEs are simpler and carry no maturity pressure.
Short maturity dates: a 12-month maturity creates unnecessary pressure.
High interest rates: above 8 percent is unusual for startups, and the interest compounds into extra dilution.
Unclear maturity terms: spell out what happens at maturity before signing.
Converts at the lower of the cap price or the discounted price per share.
Turn your metrics into a pitch narrative investors can follow.
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