Deal Terms & Term Sheets
What is a convertible note and how does it differ from a SAFE?
A convertible note is a short-term debt instrument that converts into equity at a future funding round, with an interest rate and maturity date — unlike a SAFE which has neither.
A convertible note is a loan that converts into equity (stock) when a company raises a future priced funding round. It's commonly used at the pre-seed and seed stages, though SAFEs have largely replaced it at the earliest stages.
Key features of a convertible note:
It's debt — if the company fails or the note matures without a conversion event, technically the company owes investors their money back. This creates a real obligation that SAFEs don't have.
Interest rate: Typically 5–8% per year. This interest accrues and is added to the principal, so when the note converts, investors receive slightly more equity than their original investment would have bought.
Maturity date: Usually 18–24 months. If the company hasn't raised a priced round by then, investors can demand repayment (or extend the note). This can create pressure at an inconvenient time.
Valuation cap and discount: Same mechanics as a SAFE — a cap limits the conversion price and a discount rewards early investors.
SAFEs vs convertible notes: SAFEs are simpler (no interest, no maturity, no repayment obligation). YC and most Silicon Valley seed investors have moved to SAFEs. Convertible notes are still more common in some geographies and with some angel investors who prefer the legal familiarity of debt instruments.
Related glossary terms
Related questions
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 term sheet?
A term sheet is a non-binding document that outlines the key terms of a proposed investment — valuation, amount, ownership percentage, and governance rights. It's the starting point for negotiating a deal.
What is a cap table?
A cap table (capitalization table) is a spreadsheet or document that shows who owns what percentage of a company — founders, employees, investors — accounting for all shares, options, and convertible instruments.