--- title: "Convertible Note | Altss Glossary" description: "A convertible note is a short-term loan to a startup that accrues interest and normally converts into shares at the next qualifying equity round, usually…" canonical: "https://altss.com/glossary/convertible-note" --- Glossary · Security / instrument # Convertible Note Also called: convertible debt · convertible promissory note A convertible note is a short-term loan to a startup that accrues interest and normally converts into shares at the next qualifying equity round, usually at a discount and subject to a valuation cap, rather than being repaid. Publisher: Altss LLCPublished 2026-01-08Content modified 2026-10-01 ALTSS-VC-012 Early investors lend the company money on a note. When the company later sells shares in a priced round, the loan and its interest turn into shares at a better price than new investors pay. If no round happens before the note's maturity date, the holders can usually demand repayment, extend the note or convert on fallback terms. ## Formula ### Conversion of a capped, discounted note ``` Shares = (principal + accrued interest) / lower of (cap / capitalisation defined in the note) and (1 − discount) × round price ``` `V_cap` valuation cap in the note, most often a pre-money figure `S_cap` the share count the note defines for applying the cap, usually the pre-money fully diluted capitalisation; definitions differ on whether the converting notes themselves and the new pool are included `d` discount to the round price `P_round` price per share paid by new investors in the qualified financing Whether interest converts or is paid in cash, whether it is simple or compound, and which capitalisation the cap is applied to are all set by the note; there is no single standard. ## What a note specifies A venture convertible note sets the principal, an interest rate (usually simple interest that converts with the principal rather than being paid in cash), a maturity date (commonly 12 to 24 months), the definition of a qualified financing that triggers automatic conversion (typically a minimum amount of new equity), a valuation cap and a discount. It also says what happens on a sale of the company before conversion (often repayment with a premium or conversion at the cap) and on maturity. Notes are usually unsecured and may be subordinated to bank debt. Some include a most favoured nation (MFN) clause like the [SAFE](https://altss.com/glossary/safe-simple-agreement-for-future-equity). ## Why maturity matters Because the note is debt, holders can in principle demand repayment at maturity. Few early-stage companies could repay, so the maturity date gives noteholders bargaining power if the company has not raised a priced round: extensions, higher discounts, lower caps or conversion into common or preferred at a fixed fallback valuation are typical outcomes. Until conversion, noteholders are creditors rather than shareholders; how their claims rank if the company fails depends on the note's terms, any subordination agreement and the applicable insolvency law. The maturity date and creditor status are the main structural differences from a SAFE, which has no maturity date and is not a debt instrument. ## Notes and SAFEs compared Both defer pricing to a later [priced round](https://altss.com/glossary/priced-round) and use caps and discounts. A note adds interest (which increases the number of conversion shares), a maturity date and creditor status, and usually requires a qualified financing threshold; a SAFE adds none of these. Y Combinator introduced the SAFE in 2013 as a replacement for convertible notes in early-stage fundraising; notes remain in use, for example for insider bridge rounds, outside the US, and where investors want creditor protection. ## How holders and funds account for notes A fund holding a convertible note values it at fair value, which reflects the expected conversion terms, the probability and timing of a qualified financing and the downside as a creditor, not simply principal plus interest. On the company's cap table, outstanding notes are not shares, so ownership analysis must model their conversion explicitly, including accrued interest to the expected conversion date. ## Worked example ### Illustrative conversion at a Series A An investor lends $500,000 on a note with 6% simple interest, a 20% discount and a $6m pre-money cap applied to 10,000,000 pre-money shares. Eighteen months later the company closes a Series A at $1.20 per share. Accrued interest is $500,000 × 6% × 1.5 = $45,000, so $545,000 converts. The cap price is $6m / 10,000,000 = $0.60; the discount price is $0.96. The note converts at **$0.60** into **908,333** shares, worth $1.09m at the Series A price: **2.18x** the principal, before any change in the company's value. Examples are illustrative; figures are not market data. ## Not the same as - [Simple Agreement for Future Equity (SAFE)](https://altss.com/glossary/safe-simple-agreement-for-future-equity): A SAFE is not debt: no interest, no maturity, and no creditor claim. - [Venture Debt](https://altss.com/glossary/venture-debt): Venture debt is a term loan repaid in cash, usually with warrants attached; it is not designed to convert at the next round. - Bridge Loan: In credit and real estate a bridge loan is short-term financing repaid from a later refinancing or sale; a startup's convertible bridge note is designed to convert into equity. ## Common mistakes - Forgetting that accrued interest usually converts too, which adds shares. - Comparing caps across notes without checking which capitalisation each cap is applied to. - Treating early-stage notes as safer than equity because they are debt. Most startups could not repay at maturity; the protection is mainly bargaining power. - Ignoring the maturity date when assessing a company's runway and negotiating position. ## Edge cases - No qualified financing before maturity: outcomes depend on the note (optional conversion at a fixed valuation, extension by majority of holders, or a repayment demand). - A sale before conversion: many notes pay a multiple of principal or convert at the cap, whichever is greater. - Notes held by many small investors usually allow a majority of holders to amend terms for all, which binds minority noteholders. ## Questions ### What happens if a convertible note reaches maturity? The holders can demand repayment, but in practice notes are usually extended or converted on fallback terms set in the note or negotiated with the holders. ### Is a convertible note better than a SAFE for investors? It gives creditor status, interest and a maturity date, which add leverage if the company stalls; it also adds complexity and cost. Which is better depends on the deal and the jurisdiction. ## Sources - [International Private Equity and Venture Capital Valuation Guidelines (2025 edition)](https://www.privateequityvaluation.com/Portals/0/Documents/Guidelines/2025%20IPEV%20Valuation%20Guidelines.pdf). IPEV Board, IPEV, Published 11 December 2025; in effect for quarterly reporting periods beginning on or after 1 April 2026; early adoption encouraged. Status: Current; supersedes the December 2022 edition (checked 2026-10-01). Sec. II 5.20 Venture Debt and Convertible Instruments, pp. 67-68 — supports: Fund holdings of convertible loan notes are measured at fair value, considering key terms and repayment or conversion scenarios, not simply principal plus interest - [Y Combinator SAFE (post-money) documents and SAFE User Guide](https://www.ycombinator.com/documents). Y Combinator, Post-money SAFE introduced 2018. Status: Current (checked 2026-10-01). Post-Money SAFE User Guide, introduction (p. 3) and Q&A F.5 — supports: SAFE introduced in 2013 as a replacement for convertible notes; convertible notes are indebtedness ## Related terms 8 terms - [Simple Agreement for Future Equity (SAFE)](https://altss.com/glossary/safe-simple-agreement-for-future-equity) - [Priced Round](https://altss.com/glossary/priced-round) - [Seed Round](https://altss.com/glossary/seed-round) - [Pre-Seed](https://altss.com/glossary/pre-seed) - [Dilution](https://altss.com/glossary/dilution) - [Venture Debt](https://altss.com/glossary/venture-debt) - [Cap Table (Capitalization Table)](https://altss.com/glossary/cap-table-capitalization-table) - [Venture Capital (VC)](https://altss.com/glossary/venture-capital) ## Referenced by 1 term - [Series A](https://altss.com/glossary/series-a) ## Concept record Concept ID ALTSS-VC-012 Classification Security / instrument Topics Venture capital & startups Version 2.0.0 Last reviewed 2026-10-01 Structured data [JSON](https://altss.com/reference/concepts/convertible-note.json) ## Canonical URL https://altss.com/glossary/convertible-note