What Is a Convertible Note?

  • Startup

A convertible note is a type of short-term investment used mainly by startups to raise early funding. Instead of investors receiving shares immediately, they provide a loan to the company that later converts into equity (ownership shares) during a future financing round.

Convertible notes are popular in early-stage funding because they allow startups to raise money without needing to determine their company valuation right away, which can be difficult at the beginning.

Typically, a convertible note includes several key terms:

  • Conversion event: The note converts into shares when the company raises a larger round of funding (such as a seed or Series A round).
  • Discount rate: Investors often receive shares at a discounted price compared to new investors as a reward for investing early.
  • Valuation cap: This sets a maximum company valuation at which the note will convert, ensuring early investors get a favorable share price if the company’s valuation increases significantly.
  • Interest rate and maturity date: Because it starts as a loan, the note usually accrues interest and has a deadline by which it must convert or be repaid.

In simple terms, a convertible note is a loan that turns into company shares later, giving startups quick access to capital while rewarding early investors for taking on higher risk.

R&D Offer Quiz

Step 1 of 3

Answer to find out if you're eligible for R&D tax credits.

Do the activities performed relate to a new or improved business component’s function, performance, reliability, quality, or composition?(Required)
For Example: A mid-sized packaging company develops a slightly modified cardboard box design to improve its stacking strength (reliability) for warehouse storage, involving minor adjustments to the corrugation pattern to reduce collapse under standard weight loads.
Is your company trying to discover information to eliminate uncertainty concerning the capability or method for developing or improving a business component?(Required)
For Example: A furniture manufacturer investigates whether a cheaper wood adhesive can hold joints as effectively as the current one during assembly, testing bond strength to resolve doubts about its capability in standard production lines.
Do the activities performed constitute a process of experimentation?(Required)
For Example: An auto parts supplier runs a series of bench tests on different lubricant formulations to find one that reduces friction in engine bearings more effectively, systematically comparing wear rates over simulated operating cycles.