Calculate how much you owe at maturity and how convertible notes convert to equity at your priced round.
Amount invested via convertible note
Interest accrues on the principal (typically 5–8%)
How many months until maturity
Maximum valuation for conversion purposes
Discount on round share price at conversion
Pre-money valuation at qualifying round
Total Owed = Principal × (1 + Rate × Term/12). Conversion Price = min(Cap ÷ FD Shares, Round Price × (1 − Discount))In plain English
Interest accrues on the principal. Total owed converts to shares at the lower of cap price or discounted round price.
Worked Example
$500K principal, 6% interest, 18 months: interest = $45K. Total owed = $545K. Converts like a SAFE at the lower of cap/discount price. Extra $45K gets more shares.
Convertible notes predate SAFEs and are more complex: they're legal debt that accrues interest and must be repaid or converted by the maturity date. SAFEs were created to eliminate this complexity.
In practice, most pre-seed and seed investors now prefer SAFEs. Convertible notes are still common at larger seed amounts (>$1M) where investors want the legal protections of debt, or where the company is generating revenue and investors want downside protection.
| Feature | Convertible Note | SAFE | Status |
|---|---|---|---|
Interest | 5–8% annual | None | |
Maturity Date | 12–24 months | None | |
Complexity | Higher (debt instrument) | Lower (not debt) | |
Investor Protection | Stronger | Weaker |
Source: Y Combinator · Cooley LLP Startup Documents 2024
Ignoring the maturity date
If no priced round occurs before maturity, the note holders can demand repayment — which most startups can't afford. Always plan to close a priced round or extend the note well before maturity.
Underestimating interest impact on dilution
At 8% interest over 24 months, a $1M note converts as $1.16M. If your cap is $5M, this adds significant shares issued beyond what you modelled at close.
Using a note when a SAFE would work
For most early-stage rounds under $2M, a SAFE is simpler, cheaper (no legal debt structure), and equally acceptable to investors. Use convertible notes when investors specifically require debt protections.