Convertible note: how it works and how it differs from a SAFE

• A convertible note is debt that converts into equity.
• Interest accrues and usually converts into extra shares.
• The maturity date is when the note must be repaid or converted.
• Notes commonly carry a valuation cap, a discount, or both.

How it works

An investor lends you money under a note with a few key terms: an interest rate, a maturity date, and conversion terms (usually a valuation cap and/or a discount). When you raise a qualifying priced round, the principal plus accrued interest converts into the new preferred shares. Y Combinator sums up the difference from a SAFE: both convert into equity later, but a convertible note is debt, interest accrues, and the note has a maturity date set for repayment or forced conversion.

Worked example (hypothetical)

An angel lends $200,000 at 6% simple annual interest with a $6M cap. Twenty months later you raise a seed round above the cap.

• Accrued interest: $200,000 × 6% × 20/12 = $20,000
• Amount converting: $220,000
• Converting at the price implied by the $6M cap: about $220,000 ÷ $6M = 3.7% measured against the cap, before the seed money dilutes everyone (the exact share count depends on how the note defines the cap's share base).

Terms to check on any note

• Interest rate, and whether it's simple or compounding.
• Maturity date, and what happens if you haven't raised by then.
• What counts as a qualifying financing that triggers conversion.
• Cap, discount, or both, and what happens if the company is sold before conversion.

Why it matters to a pre-seed founder

Some angels, angel groups and family offices still prefer notes, especially investors used to debt instruments. Notes work, but the maturity date is a real deadline: if you haven't raised a priced round by then, you'll need to negotiate an extension or conversion. If you have a choice, compare the note with a SAFE side by side in our SAFE vs priced round guide.