Convertible Note

Business Finance

A convertible note is a short-term debt instrument that converts to equity at a future financing round, typically at a discount and/or with a valuation cap. Used in early rounds to defer valuation discussions. Mechanics: investor lends $X, accruing 5-8% interest. At qualifying financing (e.g., Series A), the note converts to preferred stock at the new round's price minus 20-30% discount, or at the valuation cap (whichever produces more shares for the investor). Pros: fast, cheap, defers valuation. Cons: piling notes can create overhang, hidden dilution at conversion. SAFEs (Simple Agreement for Future Equity) are a YC-developed equity alternative.