Written by James Chae — Co-Founder, Expert Sapiens
Reviewed June 2026
Fundraising & Equity
What Is Convertible Note?
Definition
A convertible note is a short-term debt instrument that converts into equity — usually at the next priced funding round — rather than being repaid in cash. It is a common early-stage fundraising tool.
Unlike a SAFE, a convertible note is technically a loan — it has an interest rate (typically 5–8%), a maturity date (typically 18–24 months), and accrues interest that converts along with the principal. It converts to equity at the next priced round, usually with a valuation cap and/or discount rate that rewards early investors for their risk. If the company does not raise a priced round before the maturity date, the note becomes due — creating potential pressure on the company. Convertible notes were the standard pre-seed instrument before SAFEs were introduced and are still used, particularly outside the Y Combinator ecosystem or in contexts where investors prefer the note structure.
Why it matters
Founders taking on convertible note financing should understand both the conversion mechanics and the maturity date implications. A note coming due with no priced round in sight creates real leverage for the investor. A startup attorney can help you negotiate favorable terms and understand what you're committing to before you accept the money.