A convertible note is a short-term loan to a startup that is designed to convert into equity instead of being repaid in cash, usually when the company raises its next priced round. It is debt that wants to become stock.

Founders use convertible notes for the same reason they use SAFEs: speed and low cost, without setting a firm valuation yet. The difference is that a note is genuine debt. It carries an interest rate and a maturity date, and until it converts, it sits on the company as a liability.

How a convertible note converts

The conversion terms decide the economics. A valuation cap limits the valuation used to convert the note into shares. A discount gives the noteholder a lower price than the new investors in the priced round. Accrued interest usually converts into equity along with the principal, rather than being paid in cash. All of it eventually lands on the cap table.

The maturity risk founders miss

Maturity is the risk founders underestimate. If the note matures before a qualifying round, the holder may be entitled to repayment in cash or to convert at the cap. A company without the cash can face a hard conversation. Track maturity dates and talk to holders early. Notes are often used for bridge financing between rounds.

Convertible note vs. SAFE

Compared with a SAFE, a convertible note gives investors more downside protection through its debt features, while a SAFE is simpler and carries no repayment risk. Both eventually affect dilution, so model the conversion before you sign. This is a general explanation, not legal advice.