Comparison
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Convertible Note vs Priced Equity Round
Quick Answer
A convertible note defers valuation by issuing debt that converts to equity later, while a priced equity round sets a valuation immediately and issues preferred stock. Notes are faster and cheaper; priced rounds provide clarity but cost more in legal fees.
What is Convertible Note?
A convertible note is a form of short-term debt that converts into equity at a future financing event (typically a Series A or later priced round). The investor lends money now and receives equity later at a discounted price. Key terms include: valuation cap (maximum conversion price), discount rate (typically 15-25% off the next round's price), interest rate (4-8% annually), and maturity date (12-24 months). Convertible notes are popular for bridge rounds and early-stage raises because they avoid the complex negotiation of a full valuation and preferred stock terms. Legal costs are typically $5K-$15K.
What is Priced Equity Round?
A priced equity round (also called a priced round or preferred stock round) establishes a specific company valuation and issues preferred stock to investors at a set price per share. This is the standard structure for Series A and later rounds. A priced round involves negotiating detailed terms: pre-money valuation, liquidation preference, anti-dilution provisions, board composition, protective provisions, and information rights. The resulting preferred stock gives investors specific rights that common stockholders (founders, employees) don't have. Legal costs are $25K-$75K+ and the process takes 4-8 weeks.
Key Differences
| Feature | Convertible Note | Priced Equity Round |
|---|---|---|
| Valuation | Deferred (cap and/or discount) | Set immediately (pre-money valuation) |
| Security type | Debt (converts to equity) | Preferred stock (equity) |
| Legal cost | $5K - $15K | $25K - $75K+ |
| Timeline | 1-3 weeks | 4-8 weeks |
| Investor rights | Minimal until conversion | Full preferred stock rights immediately |
| Complexity | Simple (10-15 page doc) | Complex (50+ pages of docs) |
| When used | Pre-seed, seed, bridge rounds | Series A and later |
When Founders Choose Convertible Note
- →You're raising a small round ($500K-$2M) and want to move fast
- →You can't agree on valuation with investors
- →You want to minimize legal costs at an early stage
- →You're doing a bridge round between priced rounds
When Founders Choose Priced Equity Round
- →You're raising Series A or later (institutional VCs expect priced rounds)
- →You want clear ownership percentages for all parties
- →You have a lead investor willing to set terms and do due diligence
- →You want to establish formal governance (board, protective provisions)
Example Scenario
A startup raising $1M at pre-seed uses convertible notes: 5 angels invest $200K each with a $6M cap and 20% discount. Legal costs: $8K total, closed in 2 weeks. Eighteen months later, the startup raises a $5M Series A at $20M pre-money valuation as a priced round. The notes convert at the $6M cap (much better than the $20M Series A price), and investors receive preferred stock with full rights. Legal costs for the Series A: $50K, timeline: 6 weeks.
Common Mistakes
- 1Using convertible notes for Series A+ rounds when a priced round is standard and expected
- 2Stacking multiple convertible note rounds at different caps, creating a confusing cap table
- 3Not modeling how note conversion affects the cap table at the priced round
- 4Assuming that deferring valuation always benefits founders — a low cap can be more dilutive than a fair priced round
Which Matters More for Early-Stage Startups?
Both serve specific purposes at specific stages. Convertible notes (and SAFEs) are ideal for pre-seed and seed rounds where speed and simplicity matter. Priced rounds are the standard for Series A and beyond where institutional investors need formal governance and clear terms. The transition from notes to priced rounds is a natural milestone in a startup's funding journey.
Related Terms
Frequently Asked Questions
What is Convertible Note?
A convertible note is a form of short-term debt that converts into equity at a future financing event (typically a Series A or later priced round). The investor lends money now and receives equity later at a discounted price. Key terms include: valuation cap (maximum conversion price), discount rate (typically 15-25% off the next round's price), interest rate (4-8% annually), and maturity date (12-24 months). Convertible notes are popular for bridge rounds and early-stage raises because they avoid the complex negotiation of a full valuation and preferred stock terms. Legal costs are typically $5K-$15K.
What is Priced Equity Round?
A priced equity round (also called a priced round or preferred stock round) establishes a specific company valuation and issues preferred stock to investors at a set price per share. This is the standard structure for Series A and later rounds. A priced round involves negotiating detailed terms: pre-money valuation, liquidation preference, anti-dilution provisions, board composition, protective provisions, and information rights. The resulting preferred stock gives investors specific rights that common stockholders (founders, employees) don't have. Legal costs are $25K-$75K+ and the process takes 4-8 weeks.
Which matters more: Convertible Note or Priced Equity Round?
Both serve specific purposes at specific stages. Convertible notes (and SAFEs) are ideal for pre-seed and seed rounds where speed and simplicity matter. Priced rounds are the standard for Series A and beyond where institutional investors need formal governance and clear terms. The transition from notes to priced rounds is a natural milestone in a startup's funding journey.
When would you encounter Convertible Note vs Priced Equity Round?
A startup raising $1M at pre-seed uses convertible notes: 5 angels invest $200K each with a $6M cap and 20% discount. Legal costs: $8K total, closed in 2 weeks. Eighteen months later, the startup raises a $5M Series A at $20M pre-money valuation as a priced round. The notes convert at the $6M cap (much better than the $20M Series A price), and investors receive preferred stock with full rights. Legal costs for the Series A: $50K, timeline: 6 weeks.
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Related Questions
What is a SAFE note and how does it work?
A SAFE (Simple Agreement for Future Equity) is an investment instrument where an investor gives a startup money today in exchange for the right to receive equity at a future priced round, typically at a discount or capped valuation.
What is a SAFE note in startup fundraising?
A SAFE (Simple Agreement for Future Equity) is a contract that gives an investor the right to receive equity in a future priced round, in exchange for money invested today.
What is a SAFE note?
A SAFE (Simple Agreement for Future Equity) is an investment instrument where an investor gives a startup money now in exchange for the right to receive equity in a future priced round. It's not a loan — there's no interest rate or maturity date.
What is a bridge round in startup fundraising?
A bridge round is a small fundraise between larger priced rounds, typically used to extend runway so a startup can hit milestones needed to raise the next full round.