# Convertible note

> A convertible note is a loan from investors to a startup that is designed to convert into shares, usually preferred stock, at a later priced round. Unlike a SAFE, a convertible note is debt: it accrues interest and has a maturity date. Like a SAFE, it often converts at a valuation cap or at a discount to the price new investors pay.

Source: https://delsivo.com/glossary/convertible-note · Updated 2026-11-06

## 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](https://delsivo.com/glossary/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](https://delsivo.com/glossary/safe-note). 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.

## Frequently asked questions

### Why would a startup use a convertible note instead of a SAFE?

Some investors and some markets prefer the familiar debt structure, or need it for legal or tax reasons. Terms matter more than the label.

### What happens when a convertible note matures?

It depends on the note. Common outcomes are repayment, an agreed extension, or conversion at a set price. Read the maturity clause.

### Does accrued interest convert into shares?

Usually yes. Most notes convert principal plus accrued interest at the conversion price.

## Sources

- [U.S. SEC: What different types of securities are issued to startup investors?](https://www.sec.gov/education/capitalraising/building-blocks/startup-securities) (checked 2026-11-06)

## Related pages

- [SAFE note](https://delsivo.com/glossary/safe-note)
- [SAFE conversion calculator](https://delsivo.com/tools/safe-conversion-calculator)
- [Cap table](https://delsivo.com/glossary/cap-table)
- [Pre-seed](https://delsivo.com/glossary/pre-seed)