Key takeaways
- Debt until it converts: interest accrues and there is a maturity date.
- Principal plus accrued interest usually converts into shares.
- Read what happens at maturity if no round has happened.
How a convertible note converts
The U.S. SEC describes a convertible note as a loan from an investor that can convert into a different security, and notes that such notes are often used in seed rounds because a young company is hard to value. Conversion is usually triggered by a qualifying priced round, at the lower of the price set by the cap and the discounted round price.
A worked example
An investor lends $250,000 at 6 percent simple interest with a 20 percent discount. Eighteen months later the company raises a priced round at $1.00 a share. About $22,500 of interest has accrued, so $272,500 converts at $0.80 a share, giving roughly 340,600 shares. A cap, if lower, could give a better price.
Convertible notes in diligence
Funds ask for every outstanding note with its interest rate, cap, discount and maturity date, and model conversion on the cap table. A note near or past maturity is a negotiating point: the holders may be able to demand repayment, so an extension or conversion is often agreed during the round.
Common confusions
- A convertible note is not a SAFE. A SAFE has no interest or maturity date.
- Interest is usually paid in shares at conversion, not in cash.
- Maturity does not always mean repayment. Notes may allow extension or conversion at a set price instead.
Sources
- U.S. SEC: What different types of securities are issued to startup investors? (checked 6 November 2026)
Facts about other companies and services come from the pages listed, on the dates shown, and can change.