A convertible note is a short-term debt instrument that converts into equity at the company's next priced round rather than being repaid in cash. It typically carries four key terms: an interest rate, a maturity date, a conversion discount, and often a valuation cap, combining the speed of a loan with the upside structure of equity. It was the dominant pre-seed and seed instrument from roughly 2005 until 2013, when Y Combinator introduced the SAFE and the market gradually shifted.
The four key terms, with typical 2025 ranges:
| Term | Typical range | What it does |
|---|---|---|
| Interest rate | 4-8% per year | Accrues until conversion; rarely paid in cash |
| Maturity | 18-36 months | Note must convert, be repaid, or be extended by this date |
| Conv... |