What Is a Convertible Note? Terms, Example & SAFE Comparison (2026)

Q: What is a typical interest rate on a convertible note?

Typical convertible-note interest rates land in the 4%–8% range — broadly consistent with Carta and Cooley historical guidance. Some rare deals run at 1% or 0% (often with strategic angels who are pricing in upside). Higher-rate cycles (2023–2025) have pushed the range up modestly. Always confirm the going rate with your counsel before signing.

TL;DR — what is a convertible note?

A convertible note is a short-term debt instrument that converts into equity at the next priced round, usually with a valuation cap and a discount. Founders use them as fast bridge financing without setting a valuation upfront. The note typically accrues interest (often 4–8%) and matures in 1–3 years if no qualified round triggers conversion.

For founders looking to attract quick bridge financing before or in between venture capital rounds to keep the lights on, convertible loan notes often become the weapon of choice. Sitting at the crossroads of debt and equity, convertible notes work for early-stage startups that struggle to raise a full priced round, haven't yet landed on a defensible valuation, want to avoid early dilution, want to retain control, or want to bypass traditional high-interest loans.

Across the 600+ startups we've helped raise $3B+ — including $630M closed in 2025 — convertible notes show up most often as bridge instruments between priced rounds. Used right, they buy you 12–24 months and a cleaner valuation conversation. Used wrong, they create a debt cliff and a cap-table mess your next investor has to clean up. The rest of this post covers the five terms that decide which one you get, a worked cap-table example, and how convertible notes compare to SAFE notes — the question every founder asks first.

What is a convertible note?

A convertible note is a hybrid debt-and-equity instrument that converts into equity at a future event — usually the next priced round or an acquisition. In our work with 600+ startups, we've seen them work best as tactical bridge financing. Until conversion, the note sits on the balance sheet as debt; at conversion, principal plus accrued interest converts to shares using a valuation cap or discount.

A convertible note (also called a convertible loan or convertible promissory note) is a hybrid form of debt and equity. Under conditions both parties agree to upfront, the note converts into equity in the company that issued it. The conversion typically triggers when (1) the company raises a qualified priced round, or (2) it gets acquired. At that point, noteholders exchange their notes for shares — often at a discount or capped valuation that rewards them for taking early risk.

If conversion never happens — and the company doesn't go bankrupt — the company repays the note with interest at the maturity date. If the company fails, noteholders are treated as unsecured creditors and may recover little or nothing, depending on what's left.

Two parties are involved: the investor committing capital, and the company issuing the note. Before signing, both negotiate the terms. Convertible notes share traits of debt and equity, which makes them faster and more flexible than either pure debt (a bank loan) or pure equity (a priced round) — and that flexibility is exactly why they dominate seed-stage bridge financing.

Components of a convertible note agreement

Five terms decide how a convertible note behaves: interest rate (typically 4–8%), maturity date (1–3 years), conversion event (qualified priced round or acquisition), valuation cap (the highest pre-money at which the note converts), and discount rate (10–30% off the next round's share price). The cap and discount are the two most-negotiated levers.

How a convertible loan note works — how it converts, what happens if it doesn't, who gets what — depends entirely on the terms. Get them right and you bridge cleanly to your next round. Get them wrong and you create dilution, default risk, or a cap table that scares off Series A investors.

Pro tip — negotiate cap and discount as a package

Don't let an investor lock in an aggressive valuation cap in exchange for waiving the discount, or vice versa. Both terms protect the noteholder at conversion — give up one and you've quietly handed away more equity than you think. Always model the conversion math at three plausible Series A valuations before signing, and negotiate the cap and discount as a single package.

Five clauses form the basis of a convertible note agreement and decide what happens when:

Interest rate

Like any loan, convertible notes appreciate over time through interest at a rate both parties agree on. Although a few rare deals run at 1% or 0%, the typical range is 4–8% (broadly consistent with Carta and Cooley historical guidance — rates have drifted modestly higher in 2024–2025 with the broader rate cycle, so always confirm the going rate with your counsel).

Interest accrues on the principal until the maturity date. At conversion, the principal plus accrued interest is what gets converted to equity — meaning a higher rate quietly increases the noteholder's share count at conversion. Investors can also demand cash repayment at maturity if conversion hasn't triggered.

Maturity date

The date the loan is due to be repaid with interest if it hasn't converted. The maturity date is shaped by your stage, market, the economic climate, and the round size — but the standard range is 1 to 3 years.

Investors will often agree to extend the maturity date to give the startup more runway to hit milestones and trigger conversion. If you can negotiate that flexibility upfront — for example a built-in 6-month extension at the company's option — you remove a cliff that could otherwise force fire-sale terms.

Pro tip — find your maturity sweet spot

Set a maturity date that gives you enough runway to hit the milestones needed to trigger a priced round, but not so long it becomes a permanent line item. Most seed-stage Waveup founders land between 18 and 24 months — long enough to ship product and get to a real Series A conversation, short enough that investors feel the upside isn't indefinite.

Conversion event

For your debt note to convert into equity, one of two things typically must happen: you either raise a qualified priced funding round (usually a Series A above a stated minimum size — often $1M+), or someone acquires your company. The note agreement defines the threshold for what counts as a qualified financing — pay attention to that number, because a partial bridge round may not trigger conversion.

Valuation cap

A convertible note valuation cap is the highest valuation (usually pre-money) at which the note converts into equity at the next round. The cap is typically set lower than the company's expected next-round valuation — that's how it rewards the noteholder for taking early risk. The lower the cap relative to the next-round valuation, the better the conversion price for the investor and the more dilution for founders.

Example: if your company is valued at $10M at the priced round but your convertible note's cap is $2M, a $200,000 investment converts as if the company were worth $2M — a 10% stake instead of the 2% they'd get at the actual round price.

The opposite case also happens: if the cap is higher than your eventual valuation, the cap doesn't kick in, and noteholders fall back on the discount rate to get a better deal than new investors.

Discount rate

If the valuation cap doesn't help the noteholder at conversion, they can take the discount rate instead — buying shares at a discount to the new investors' price. Where new investors pay the full price-per-share calculated from the round's pre-money valuation, noteholders get the same shares at, say, 80% of that price.

Discount ranges scale with stage: Pre-seed to Series A startups normally offer 20%–30%, while Series B and later stay within 10%–20%. These ranges match Carta and Cooley historical guidance — anything aggressively outside them deserves a hard look.

Example: a 20% discount means investors use their principal plus interest to buy your shares at 80% of the priced-round share price — meaning their dollars buy 25% more shares than a new investor's would.

Convertible note vs. SAFE note: which should you pick?

A convertible note is debt with an interest rate and a maturity date — it must be repaid or converted by a deadline. A SAFE is a contract for future equity with no interest, no maturity, and no debt obligation. Use a SAFE at pre-seed when speed matters most, a convertible note when investors want some downside protection, and a priced round once you have a defensible valuation.

The single most-Googled question about convertible notes is how they compare to SAFE notes. Both are pre-priced-round instruments, but they differ on five things investors and founders both care about: debt status, interest, maturity, dilution timing, and which stage they fit best.

SAFE vs. Convertible Note vs. Priced Equity round — 2026 founder reference table.

Dimension	SAFE	Convertible Note	Priced Equity Round
Instrument type	Contract for future equity (not debt)	Debt that converts to equity	Equity issued today at a set price
Maturity date	None — no deadline	1–3 years (standard)	N/A — equity is permanent
Interest rate	None	4–8% (typical)	None
Valuation cap	Common (post-money cap)	Common (pre-money cap)	N/A — valuation is set
Discount	Common (10–25%)	Common (10–30%)	N/A
Conversion trigger	Next equity round, M&A, or dissolution	Qualified priced round or acquisition	Already converted — shares are issued
Repayment risk for company	None — never has to be repaid	Yes — must repay or convert at maturity	None
Best for stage	Pre-seed; YC + speed-driven rounds	Seed bridge; angel-led pre-Series-A	Seed-priced through Series A and beyond

When to pick which: stage-by-stage decision rule

Pick a convertible note when

You're bridging to a near-term priced round (12–24 months out) and angels want some downside protection in case the round slips
Your investors are East-Coast or non-YC angels who prefer the familiarity of debt over the relative novelty of a SAFE
You want a built-in deadline that forces you (and your investors) to commit to a priced round on a known timeline
Your check sizes are larger ($500K–$2M+) — investors writing big cheques often want the legal protection that comes with a debt instrument

Use a SAFE or priced round instead when

You're at pre-seed and speed is everything — SAFE docs are 5 pages; convertible notes are 15+. SAFE wins the time-to-close race
Your investors are YC, Bessemer, or West-Coast funds who default to SAFEs and would prefer not to negotiate a custom note
You can't tolerate a maturity-date cliff — pre-revenue startups whose runway might slip should avoid debt obligations that mature before product-market fit
You already have a defensible valuation — at that point a priced seed round (or Series A) is cleaner for everyone, with no future conversion math to argue over

Y Combinator has published its strong preference for SAFEs at pre-seed for exactly the reasons above — speed, simplicity, and no debt cliff. Outside the YC ecosystem, however, convertible notes still dominate: every angel network, family office, and seed-stage syndicate we work with at Waveup will sign a convertible note in their sleep. Pick the instrument your investors already understand.

Convertible note vs. equity: what's the difference?

Convertible notes vs. Equity. What is the difference Table 1

Convertible notes vs. Equity. What is the difference Table 2

A priced equity round sets a valuation today, issues shares immediately, and dilutes founders the moment it closes. A convertible note delays both the valuation and the dilution until a future event — but adds interest, a maturity date, and the risk that it must be repaid in cash if conversion never triggers. Equity is simpler; convertible notes are faster and cheaper at the seed bridge stage.

To understand convertible notes more deeply, here's how they line up against priced equity rounds across the dimensions founders care about most:

Convertible note vs. priced equity round — process and document differences.

Dimension	Convertible Note	Priced Equity Round
When valuation is set	Deferred to next priced round	Set today, before money lands
Speed to close	Days to a few weeks	Weeks to months (term sheet → diligence → docs)
Legal cost (typical)	$3K–$10K (single debt agreement)	$25K–$75K+ (term sheet + SPA + IRA + cap-table updates)
Dilution timing	At future conversion event	At round close — immediate
Investor rights	Limited until conversion	Board seat, info rights, pro rata, protective provisions
Documents required	1 (the note); sometimes a side letter	5–10 (SPA, IRA, ROFR, voting agreement, etc.)

Convertible note vs. priced equity — economic outcome at conversion.

Outcome	Convertible Note	Priced Equity Round
Founder dilution at funding	0% (note is debt, no shares issued)	10–25% per round (immediate)
Future dilution	Yes, at conversion (cap + discount + interest = bigger share count)	Already accounted for in cap table
Repayment obligation	Yes, if maturity hits before conversion	None — equity is permanent
Interest accrued	4–8%/year, added to principal at conversion	None
Investor priority in liquidation	Senior to equity (unsecured creditor)	Behind debt holders, often pari passu with other equity
Cap-table complexity	Higher — multiple notes with different caps and discounts compound	Lower — one share class, one price

How a convertible note works: conversion process example

At a qualified priced round, the noteholder's principal plus accrued interest converts to shares using whichever gives them the better deal: the valuation cap (capped pre-money divided by next-round pre-money, then multiplied by the new share price) or the discount rate (one minus the discount, multiplied by the new share price). The result is a per-share conversion price almost always lower than what new investors pay.

Let's run the math on a hypothetical scenario: an early-stage company issues a convertible note, then successfully raises a qualified Series A a year later, and the note converts.

Before the note is signed, the company is owned by two founders, each holding 1.5M shares (3M total).

Worked example — deal terms

Investment amount: $750,000
Interest rate: 6%
Discount rate: 25%
Pre-money valuation cap: $8M
Maturity date: 2 years

Step 1 — the conversion event

A year later, the company raises $2M at a $12M pre-money valuation. The new-investor share price is calculated by dividing pre-money by outstanding founder shares: $12M ÷ 3M = $4 per share. New investors get $2M ÷ $4 = 500,000 shares.

Step 2 — calculate cap-vs-discount

With the new round priced, conversion happens using whichever offers a better deal — the cap or the discount:

Valuation cap scenario: new-investor price × (cap ÷ pre-money) = $4 × ($8M ÷ $12M) = $2.67 per share
Discount rate scenario: new-investor price × (1 − discount) = $4 × (1 − 0.25) = $3.00 per share

The cap wins at $2.67 per share — that's the noteholder's conversion price.

Step 3 — calculate accrued interest

By conversion, interest has accumulated on the principal: $750,000 × 6% = $45,000. Total convertible amount: $750,000 (principal) + $45,000 (interest) = $795,000.

Step 4 — calculate shares issued

Convertible note to equity: $795,000 ÷ $2.67 per share = approximately 297,753 shares to the noteholder.

Step 5 — recalculate the cap table

After the dust settles, the cap table looks like this:

Note converters: 297,753 shares — 7.66% stake
New Series A investors: 500,000 shares — 12.86% stake
Founders: 3,000,000 shares — 77.18% combined (down from 100%)
Total shares outstanding: 3,797,753

Founders are diluted by 22.82% at conversion — split between the new investors (12.86%) and the noteholders (7.66%). The note's cap and discount mechanics decide how much of that goes to the noteholders versus the new round investors.

Waveup experience

Across the 600+ startups we've supported in raising $3B+ — including $630M closed in 2025 — the founders who get the best convertible-note terms negotiate the cap and discount as a single package, never one without the other. They also model the conversion math at three plausible next-round valuations before signing. The five extra hours of cap-table work upfront save five percentage points of dilution at conversion — every time.

Convertible notes: upsides and trade-offs for startups

Convertible notes are great for founders who need to bridge to a near-term priced round without setting a valuation today. They're risky for pre-revenue founders whose runway might slip — the maturity date creates a debt obligation that can force fire-sale terms or default. Use them tactically as a bridge instrument, not as a substitute for a real priced round.

Pros

✅ Delayed valuation. Convertible notes let you postpone setting a valuation until your startup is more developed and easier to assess.
✅ Speed to close. Convertible notes attract investors faster than priced rounds, cutting through the lengthy diligence and document negotiation that come with priced equity. Funds can land in days, not months.
✅ Ownership retained — until conversion. The note is debt, so it doesn't dilute founders until it converts — a meaningful win for keeping early control.
✅ Built-in milestone pressure. The maturity date creates a deadline that forces real progress toward the next round.

Cons

❗ Future dilution risk. When notes convert, your slice shrinks — and the conversion math compounds across multiple notes with different caps and discounts. Negotiate caps and discounts together, or you'll lose more equity than you expect.
❗ Debt obligation. Until conversion, the note sits on your books as debt — a liability that can scare future investors and complicate diligence.
❗ Future-financing complications. Series A investors will scrutinise note terms; the cumulative dilution of converting multiple notes can spook the next round.
❗ Default risk. If you don't raise additional funds or hit a conversion event before maturity, you face default — the cliff every convertible-note founder must plan around.

When to use a convertible note: stage-by-stage rules

Convertible notes shine at the seed-bridge stage — when you've already done a pre-seed round (or SAFE) and need 12–24 months of runway before a priced Series A. They're a poor fit at pre-seed (SAFE is faster) and at Series A or later (a priced round is cleaner). Stage and time-to-next-round are the two variables that matter most.

Stage-by-stage convertible-note logic

A convertible note fits when

You're seed-stage, post-pre-seed, with a clear path to a priced Series A in 12–24 months
Your angels or seed funds want debt-style downside protection rather than a SAFE
You're raising bridge capital between two named priced rounds
Your check sizes are mid-size ($250K–$2M individual) and the legal cost of a priced round isn't justified yet
You need to close in days, not months, to take advantage of momentum or runway pressure

Skip convertible notes when

You're pre-seed in the YC orbit — SAFE is faster, simpler, and what your investors expect
You can't realistically trigger a qualified round before maturity — debt without a path to conversion is just debt
You already have a defensible valuation — go straight to a priced seed round, no future conversion math to argue about
You're raising more than $3M — at that size, the legal economics flip in favour of a priced round
Your runway is fragile — pre-revenue startups whose runway might slip should avoid debt cliffs that mature before product-market fit

Convertible notes — the bottom line

Across 600+ startups and $3B+ raised, we've seen convertible notes work best as tactical bridge financing for seed-stage founders 12–24 months from a Series A. Not a substitute for a real priced round, and not the right pick for fragile pre-revenue runways. Negotiate cap and discount together, and never sign without a credible path to conversion.

Convertible notes are tactical bridge financing — not a substitute for a priced round. Used right, they buy you 12–24 months of runway and a cleaner valuation conversation. Used wrong, they create a debt cliff and a cap-table mess your next investor has to clean up.

Three things separate the founders who get good convertible-note outcomes from the rest:

Negotiate cap and discount together. Don't trade one for the other. Both protect the noteholder; giving up either quietly hands away more equity than you'd think.
Hit the milestones the note assumes. The maturity date is a contract — investors assume you'll be ready for a qualified priced round before it hits. If your runway is tight, build in a 6-month extension at company option.
Plan the cap-table math before you sign. Model conversion at three plausible Series A valuations. The dilution at the cap-vs-discount inflection point is where most founders get surprised — don't be one of them.

If you're navigating a bridge round, a convertible note is one of three options on the table — alongside SAFE notes and non-dilutive funding. The right pick depends on your stage, your investor mix, and how close you are to a priced round. We've helped founders pick between all three across 600+ startups and $3B+ raised — so when in doubt, model the math, talk to your counsel, and pick the instrument your next investor will respect.

Mapping out your bridge round? We can stress-test your convertible-note terms before you sign.

Talk to Waveup

FAQ

These are the questions we hear most often across 600+ Waveup startup engagements: how the conversion math works, what a typical interest rate looks like in 2026, what happens at maturity if no qualified round triggers conversion, and how convertible notes stack up against SAFEs and priced equity rounds. Each answer below reflects what we recommend in real bridge-round diligence.

A convertible promissory note (also called a convertible debt note or convertible loan) is a form of bridge financing initially given to a company as debt with the option to convert into equity at a future event. The terms — when conversion happens, what happens if it doesn't, and at what price — are defined upfront in the note agreement signed by the investor and the founder.

Yes — unless the note converts to equity first or the company files for bankruptcy. If neither happens, the company must repay the principal plus accrued interest at the maturity date. If the company can repay in cash, it does. If it can't, the parties typically renegotiate (extend maturity, convert at a fixed valuation, or restructure the debt).

Convertible noteholders are treated as unsecured creditors in a bankruptcy — better off than equity investors but worse off than secured creditors and bondholders. They may recover little or nothing depending on the company's financial situation at the time of failure. This is why convertible notes are riskier than they look on the upside but riskier on the downside than equity investors often realise.

At a qualified priced round, the principal plus accrued interest converts to shares at whichever price is better for the noteholder: the valuation-cap price (capped pre-money ÷ actual pre-money × new share price) or the discount price (1 − discount × new share price). The conversion price is almost always lower than what new investors pay — that's the early-risk reward.

Typical convertible-note interest rates land in the 4%–8% range — broadly consistent with Carta and Cooley historical guidance. Some rare deals run at 1% or 0% (often with strategic angels who are pricing in upside). Higher-rate cycles (2023–2025) have pushed the range up modestly. Always confirm the going rate with your counsel before signing.

Both — but at different points in time. Until conversion, a convertible note is debt: it sits on the balance sheet as a liability, accrues interest, and creates a repayment obligation at maturity. After conversion, it becomes equity: principal plus accrued interest is exchanged for shares. This hybrid status is why convertible notes are faster than priced rounds (no valuation set today) but riskier than SAFEs (which are pure contracts for future equity, with no debt obligation).

A convertible note is debt with interest and a maturity date — it must be repaid or converted by a deadline. A SAFE note is a contract for future equity with no interest, no maturity, and no debt obligation. SAFEs are faster to sign and cheaper to paper; convertible notes give investors more downside protection. Pick a SAFE at pre-seed where speed matters most, a convertible note for seed bridges where investors want debt-style protection.

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Last reviewed by Igor on 2026-05-01.

102 posts

Igor Shaverskyi

Founder, Waveup

Igor Shaverskyi is the founder of Waveup, which he launched in 2015. Over the past decade he has helped 500+ startups navigate both dilutive and non-dilutive funding paths, with founders raising more than $3B in capital. His perspectives on startup fundraising have been featured in TechCrunch, Forbes, and The Next Web.

15 posts

Anna

Content Writer

Hi there! I’m Anya, a Content Writer at Waveup. I’ve been working with startups in various industries for over 4 years, soaking up the knowledge and learning from their business strategies. Now, I collaborate with the best minds here at Waveup to pick up their expertise and share it with the readers.