--- url: 'https://qubit.capital/blog/investor-notes-for-founders' title: 'What Is a Convertible Note? How It Works, With Examples' author: name: Mayur Toshniwal url: 'https://qubit.capital/blog/author/mayur' date: '2026-04-17T16:30:12+05:30' modified: '2026-10-01T17:56:46+05:30' type: post categories: - Fundraising image: 'https://qubit.capital/wp-content/uploads/2026/10/investor-notes-for-founders-banner.webp' published: true --- # What Is a Convertible Note? How It Works, With Examples Table of Contents - [Key Takeaways](#key-takeaways) - [What Is a Convertible Note?](#what-is-a-convertible-note) - [The Four Terms in Every Convertible Note](#the-four-terms-in-every-convertible-note) [Valuation Cap](#valuation-cap) - [Discount](#discount) - [Interest Rate](#interest-rate) - [Maturity Date](#maturity-date) - [How a Convertible Note Converts: a Worked Example](#how-a-convertible-note-converts-a-worked-example) - [What Happens When a Convertible Note Reaches Maturity](#what-happens-when-a-convertible-note-reaches-maturity) - [Convertible Note vs SAFE vs Priced Round](#convertible-note-vs-safe-vs-priced-round) - [Before You Sign](#before-you-sign) ## Key Takeaways - A convertible note is a loan today that becomes shares at your next priced round. - Four terms set the outcome: valuation cap, discount, interest rate and maturity date. - The note converts at the lower of the cap price and the discount price, so model both before signing. - A note that reaches maturity unconverted usually gets extended or renegotiated, not repaid. A convertible note is a short-term loan from an investor that turns into shares in your company at a later funding round. You repay the investor in equity instead of cash, usually at a lower share price than the next round’s investors pay. Founders use notes to raise money before anyone has to agree on what the company is worth. That question moves to the next priced round, when there is more data to price it. This page covers the four terms every note carries and one conversion worked through in numbers. It also covers what happens if the note runs out of time. ## What Is a Convertible Note? A convertible note is debt on day one and equity later. The company carries it as a loan until a set event [converts it into shares at a priced equity round](https://qubit.capital/blog/convertible-note-vs-equity). The point is timing. At pre-seed and seed there is little revenue or history to set a share price, so both sides defer it. The note sets the rules for how the money converts once a price exists. Notes are now the less common choice at the earliest stage. They made up [a record low 7%](https://carta.com/data/state-of-pre-seed-q1-2026/) of pre-seed rounds on Carta in Q1 2026. Notes still appear when investors want a loan’s protections, such as a repayment date, and in [bridge rounds between two priced rounds](https://qubit.capital/blog/bridge-rounds-funding-runway). ## The Four Terms in Every Convertible Note Every note sets four numbers. Together they decide how many shares the investor gets, and when. ### Valuation Cap The cap is the highest company valuation at which the note converts. When the next round prices the company above the cap, the noteholder converts as if it were priced at the cap. The lower the cap, the more shares the investor gets for each dollar. That makes the cap a pricing decision, even though no price is set. Sagar Agrawal, co-founder of [Qubit Capital](https://qubit.capital), puts it this way: > “A note does not skip the valuation conversation. It moves it to your next round, and the cap you sign today is where that conversation starts.” ### Discount The discount is a percentage off the price new investors pay in the next round. Blake Hart of the startup law firm [Vela Wood](https://velawood.com/the-basics-of-convertible-notes/) calls 20% standard. When a note has both a cap and a discount, the investor converts at whichever gives the lower price. ### Interest Rate A note accrues interest because it is a loan, but the interest is rarely paid in cash. It adds to the amount that converts, so the investor ends up with slightly more shares. Hart, a senior attorney at Vela Wood, gives the usual range: > “We typically see 6% to 8% interest on convertible notes.” Carta’s data agrees: the median rate on convertible notes was [7% in Q1 2025](https://carta.com/data/state-of-pre-seed-q1-2025/). On a $500,000 note, 6% a year adds $30,000 to what converts. Spend your negotiating time on the cap, not the rate. ### Maturity Date The maturity date is when the loan comes due if it has not converted. The typical range is [12 to 24 months](https://www.jpmorgan.com/insights/business-planning/how-convertible-notes-work-for-startups-and-founders). Most notes also set a minimum round size, called a qualified financing, that triggers conversion automatically. ## How a Convertible Note Converts: a Worked Example Say you raise $500,000 on a note with a $5 million cap, a 20% discount and 6% simple interest. It matures in 24 months, and 18 months in you raise a priced round at $10 million before the new money. To keep the math simple, assume 10 million shares exist before the round, so new investors pay $1.00 a share. Interest comes first: 18 months at 6% adds $45,000, so $545,000 converts. The discount price is $0.80 a share. The cap price is $0.50 ($5 million divided by 10 million shares), and the note takes the lower one. | Next round valuation (before new money) | New investors pay | Discount price | Cap price | Note converts at | Shares the note gets | | --- | --- | --- | --- | --- | --- | | $10 million | $1.00 | $0.80 | $0.50 | $0.50 (cap) | 1,090,000 | | $6 million | $0.60 | $0.48 | $0.50 | $0.48 (discount) | 1,135,417 | At $10 million, the noteholder gets twice as many shares per dollar as the new investors. Real conversions also depend on the option pool and on how the cap is defined. Both are common [cap table mistakes that stall a Series A](https://qubit.capital/blog/cap-table-mistakes-series-a), so model yours before you sign. ![How a $500K Convertible Note Converts at a Priced Round](https://qubit.capital/wp-content/uploads/2026/10/how-a-convertible-note-converts-a-worked-example_a16.webp) ## What Happens When a Convertible Note Reaches Maturity The note is due, principal plus interest, when no qualified round closes before the maturity date. Few startups have that cash, and investors rarely demand it, since forcing repayment could push the company into insolvency. [AngelList](https://www.angellist.com/learn/convertible-note) lists the usual outcomes: - The investor extends the maturity date, often in return for a lower cap or a bigger discount. - The note converts into shares now, on renegotiated terms. - The company repays the note, which is rare. The better fix is to raise the note against a plan that reaches the next round in time. Vickrum Nabar, a vice president in J.P. Morgan’s startup banking team, puts it in one line in the same J.P. Morgan guide: > “Notes should fund progress, not just time.” Before you sign, name the milestone the money buys and check it lands well inside the maturity date. Where it falls short, ask for a longer maturity now, while you still have room to ask. ![Three Ways a Convertible Note Resolves at Maturity](https://qubit.capital/wp-content/uploads/2026/10/what-happens-when-a-convertible-note-reaches-maturity_a15.webp) ## Convertible Note vs SAFE vs Priced Round A note is one of several [convertible securities startups use before a priced round](https://qubit.capital/blog/convertible-securities-for-startups). The closest alternative is the SAFE (Simple Agreement for Future Equity), published by Y Combinator. A SAFE converts the same way but is not debt. It has no interest and no maturity date, so there is nothing to repay. A priced round sets the share price now and issues shares at closing. | | Convertible note | SAFE | Priced round | | --- | --- | --- | --- | | What it is | A loan that converts to shares | A contract for future shares | Shares sold now | | Interest | Yes | No | No | | Maturity date | Yes, often 12 to 24 months | No | No | | Price set now | No, the cap is a ceiling | No, the cap is a ceiling | Yes | | Legal work | Moderate | Low to moderate | High | Source: J.P. Morgan’s guide, linked above. In practice the maturity date is the difference founders feel most. A SAFE never comes due and a note does. So [choosing between a SAFE and a convertible note](https://qubit.capital/blog/safe-vs-convertible-note) often comes down to how sure you are of the next round’s timing. ![Convertible Note vs SAFE vs Priced Round](https://qubit.capital/wp-content/uploads/2026/10/convertible-note-vs-safe-vs-priced-round_a19.webp) ## Before You Sign A convertible note is a loan that turns into shares at your next priced round. The cap, discount, interest and maturity set the terms. Of the four, the cap does most to decide how much of your company the investor ends up owning. So set the cap from comparable rounds, not from what gets the note signed fastest. Qubit Capital’s [Fundraising Assistance](https://qubit.capital/startup-services/fundraising-assistance) helps founders weigh the cap, discount and maturity before they sign. Keep building toward your next milestone while our team runs the investor side of your raise.