Convertible Note
A short-term loan that converts into equity during a future funding round.
Definition
A convertible note is a debt instrument that converts into equity at a later priced round (usually Series A or seed). Key terms include: principal (the investment amount), interest rate (typically 2-8%, accrues but isn't paid), discount rate (usually 15-25% discount to the next round's price), valuation cap (maximum valuation for conversion), and maturity date (when the note must be repaid or converted).
Convertible notes were the standard early-stage instrument before SAFEs gained popularity. They're still common because they're well-understood legally and provide some downside protection to investors.
Why it matters for founders
Convertible notes let you raise money quickly without negotiating a valuation when your company is hard to value. They defer the valuation discussion to a later round when there's more data. Understanding the terms prevents founders from giving away too much equity.
Example
A founder raises $250K on a convertible note with a $3M valuation cap and 20% discount. When they raise a $5M-valuation seed round, the note converts at the $3M cap (not $5M), giving the angel investor more shares. The cap protects the early investor's upside.
How Foundra helps
Foundra helps founders build the traction needed to negotiate favorable convertible note terms - higher caps and lower discounts come from demonstrated progress.
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Related terms
SAFE Note
A Simple Agreement for Future Equity - an investment instrument that converts to equity at a future priced round.
Seed Round
The first significant round of venture funding, typically $500K-$5M.
Pre-Money Valuation
The value of your startup before receiving new investment.
Equity Dilution
The reduction in a founder's ownership percentage when new shares are issued to investors.