---
title: "Convertible Note"
url: "https://mahouse.world/glossary/convertible-note"
type: "glossary term"
topic: "Venture funding"
author: "Ihor Vlasov"
reviewed: "2026-09-20"
published: "2026-08-10"
---

# Convertible Note

A convertible note is a loan to a company that converts into shares at its next priced funding round, usually at a discount to that round's price or at a valuation cap, rather than being repaid in cash. It lets a startup take money now without agreeing a valuation, gives the investor debt's protection until conversion and equity's upside after it, and is the older, more creditor-like cousin of the SAFE.

**Also known as:** Convertible loan note, CLN, Convertible debt

## Key facts

- **Used at:** pre-seed and seed rounds, bridge financing between rounds, and — because it is debt — situations where an investor wants a claim if the equity round never comes
- **Binding:** yes — a loan agreement or note instrument with a principal, an interest rate, a maturity date and conversion terms
- **Typical terms:** interest of 5–8% a year, accrued rather than paid; a conversion discount of 15–25% to the next round's price; a valuation cap; a maturity of 18–36 months; a qualified financing threshold (a round of at least a stated size) that triggers automatic conversion
- **Typical outcome:** conversion at the lower of the discounted price and the cap price, with accrued interest converting too; if no round comes by maturity, repayment, extension or conversion at the cap — negotiated at the time, from weakness
- **Parties:** the company, the noteholders (angels, seed funds, sometimes existing investors bridging to the next round), and the lead investor of the round that triggers conversion, who inherits the terms

## How a convertible note works in practice

An angel lends €500,000 on a note: 6% interest, a 20% discount, a €10m cap, 24 months' maturity, converting automatically on a qualified round of €2m or more. Eighteen months later the company raises a €6m Series A at a €24m pre-money — €3.00 a share. The note converts at the lower of €2.40 (the 20% discount) and the cap price (€10m ÷ the pre-round share count, say €1.25). The cap wins: the €500,000 plus €45,000 of accrued interest converts at €1.25 into 436,000 shares, worth €1.3m at the round price. The angel took the earliest risk and is paid for it; the Series A investor priced the round knowing the note would take shares from the pre-money.

The debt character is what distinguishes it from a SAFE. Until it converts, the note is a liability: it accrues interest, it has a maturity date, and if the company fails, noteholders rank ahead of shareholders for whatever is left. If the company never raises a qualified round, maturity arrives with the company unable to repay, and the noteholders and founders negotiate — an extension, conversion at the cap into ordinary shares, or the noteholders' right to call the loan and take the company. In fintech, where the round may wait on a licence, maturity should be set by the licence timetable, not the fundraising calendar.

## Example

A lending startup raises €1.2m on convertible notes from six angels: 6% interest, 20% discount, €8m cap, 24-month maturity, qualified round €3m. The licence takes longer than planned and the Series A — €5m at €20m pre-money, €2.00 a share — closes in month 27, after two maturity extensions the angels grant in exchange for the cap being cut to €7m. At conversion the notes are worth €1.39m with interest; the cap price is €0.875 a share against a discounted €1.60; the notes convert into 1.59m shares — 6.4% of the post-money company for €1.2m of cash, against the Series A's 20% for €5m. The founders' stake is 5 points lower than the round's headline implied, and the angels' patience through the licence delay was paid for by the cap cut.

## Common mistakes

- Maturity set by optimism, arriving before the round the note was meant to bridge to.
- No cap, so a strong round converts the note at a discount to a price it never bore the risk of.
- A cap so low that the note takes a large slice of the company before the Series A prices it.
- Several notes at different caps and discounts, each converting on its own terms into a cap table nobody modelled.
- Founders forgetting the note is debt: interest accrues, and a lender can enforce.

## Related terms

- [SAFE](https://mahouse.world/glossary/safe.md)
- [Seed Investment](https://mahouse.world/glossary/seed-investment.md)
- [Valuation Cap](https://mahouse.world/glossary/valuation-cap.md)
- [Bridge Financing](https://mahouse.world/glossary/bridge-financing.md)
- [Pre-Money Valuation](https://mahouse.world/glossary/pre-money-valuation.md)
- [Cap Table](https://mahouse.world/glossary/cap-table.md)

— Ihor Vlasov, M&A FinTech Expert. Last reviewed 2026-09-20. https://mahouse.world/authors/ihor-vlasov