A convertible note is a form of short-term debt that converts into equity, typically at a discount, when a startup raises its next round of funding. It's a popular instrument for bridge rounds and early-stage investments because it defers the need for a company valuation.

Key Terms in a Convertible Note

• Interest Rate: Typically 4-8% annually, accruing until conversion
• Maturity Date: Usually 18-24 months; the deadline for conversion or repayment
• Valuation Cap: Maximum valuation at which the note converts to equity
• Discount Rate: Percentage discount on the next round's price (typically 15-25%)
• Conversion Trigger: The event that triggers conversion (usually a qualified financing round)

Convertible Note vs SAFE

Unlike SAFEs, convertible notes are debt instruments with interest rates and maturity dates. They're older and more established but more complex. SAFEs are generally founder-friendlier, while convertible notes may be preferred by investors who want debt protections.