Equity · Fundraising

Convertible notes: interest, maturity, and what happens when no round comes.

How debt that is meant to become equity actually converts, with a worked example and an honest comparison against SAFEs.

Glide Research11 Aug 202610 min read

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In short

What is a convertible note?

A convertible note is a short-term loan to a startup that is designed to be repaid in shares rather than cash. It accrues interest and has a maturity date like any debt, but converts into equity at a discount or a valuation cap when the company closes a priced round.

Debt on the balance sheet until conversion · typically 12–36 month maturity

Key takeaways

A convertible note is genuinely debt. It sits on the balance sheet as a liability, accrues interest, and has a maturity date at which the holder can demand repayment.
Interest usually accrues rather than being paid in cash, and converts into shares along with the principal. It is compensation for time and risk, not a yield the investor expects to collect.
A valuation cap and a discount work exactly as they do on a SAFE: the cap limits the conversion valuation, the discount takes a percentage off the round price, and the holder takes whichever gives more shares.
Maturity is the feature that distinguishes a note from a SAFE. If no priced round has happened by then, the note is technically due, and the parties have to do something about it.
Most maturing notes are not repaid. They are extended, converted at a negotiated price, or converted into common stock at the cap — all of which require the founders to reopen a negotiation from a weak position.
Notes carry legal and accounting overhead a SAFE does not: interest calculations, a liability on the balance sheet, and potential state usury and securities considerations.
SAFEs displaced notes in US seed rounds, but notes remain common outside the US, in bridge financings, and wherever an investor wants the leverage a maturity date provides.

Debt that is meant to become equity

A convertible note starts life as a loan. The investor lends the company money; the company signs a promissory note promising to repay it with interest by a stated date. What makes it convertible is a clause saying that if the company sells preferred stock in a qualified financing before that date, the outstanding balance automatically converts into shares of that preferred stock instead of being repaid.

The reason to structure a seed investment this way is the same reason SAFEs exist: nobody has to agree what the company is worth. A note defers the valuation to the round where there are real numbers to argue over. The reason to use a note rather than a SAFE is that the note gives the investor something a SAFE does not — a date on which they can ask for their money back.

In practice that right is more useful as leverage than as a way to actually recover cash. A seed-stage company that has not raised a priced round in two years usually does not have the money, and forcing it into insolvency converts a small loss into a total one. But the date exists, and it changes the balance of the conversation.

The four terms that matter

Almost every convertible note is built from the same four numbers. Everything else in the document is machinery around them.

The core economic terms of a convertible note
Term	What it does	What to look at
Principal	The amount lent. This is the base that converts.	Whether multiple notes in the same round share terms, or each was negotiated separately.
Interest rate	Accrues on the principal and normally converts into shares rather than being paid in cash.	Whether it is simple or compounding, and the day-count convention. Simple annual interest is the common case.
Maturity date	The date the note becomes repayable if it has not converted.	What the document says happens on that date, and whether a majority of holders can extend it for everyone.
Cap and/or discount	Sets the conversion price. The cap limits the valuation; the discount takes a percentage off the round price.	Whether the cap is stated pre-money or post-money, and exactly which shares are in the denominator.

A fifth term worth reading is the definition of "qualified financing" — the minimum round size that triggers automatic conversion. A small bridge round below that threshold will not convert the note.

A worked conversion

Take a $500,000 note at 5% simple annual interest with a 24-month maturity, a $8,000,000 pre-money valuation cap and a 20% discount. Eighteen months in, the company raises a Series A priced at $2.00 per share. Its fully diluted share count immediately before the round, excluding the note, is 10,000,000.

Note conversion arithmetic

1. Accrue the interest
$500,000 × 5% × 18/12 = $37,500. The converting balance is $537,500, not $500,000.
2. Compute the discount price
$2.00 × (1 − 0.20) = $1.60 per share. At that price, $537,500 buys 335,937 shares (335,937.5 rounded down).
3. Compute the cap price
$8,000,000 cap ÷ 10,000,000 pre-money fully diluted shares = $0.80 per share. At that price, $537,500 buys 671,875 shares.
4. Take the better of the two
The cap gives more than twice as many shares, so it governs. The holder receives 671,875 shares of Series A preferred.
5. Mark it to the round price
671,875 × $2.00 = $1,343,750 of value on $500,000 invested. Of that, the accrued interest alone bought 46,875 shares — $93,750 at the round price.

The same $500,000 note under three different Series A prices
Series A price	Discount price	Cap price	Shares issued	Value at round price	Multiple on $500,000
$2.00	$1.60	$0.80	671,875	$1,343,750	2.69×
$1.20	$0.96	$0.80	671,875	$806,250	1.61×
$0.80	$0.64	$0.80	839,843	$671,875	1.34×

All three rows convert the same $537,500 balance. In the first two the cap price of $0.80 is lower than the discount price, so the cap governs. In the third the round prices at the cap, so the 20% discount takes over and buys $537,500 ÷ $0.64 = 839,843 shares. Value figures are the shares multiplied by the Series A price and ignore the note's own dilutive effect on that price.

What happens at maturity

This is the part of the document founders skim and later regret. If the maturity date arrives with no qualified financing, the note is due. What the note says next determines whether that is an administrative formality or a crisis.

Common maturity outcomes
Outcome	How it happens	What it means for the founders
Extension	Holders — often a stated majority acting for all — agree to push the date out.	The most common outcome. Usually granted, sometimes in exchange for a lower cap or a higher rate.
Conversion at the cap	The note converts into common or into a new preferred series at the cap price, by its own terms or by agreement.	Resolves the liability, but prices the company without a lead investor setting the number.
Conversion at a negotiated price	The parties agree a valuation outside any round.	The negotiation happens with a repayable debt on the table, which is not a strong position.
Repayment	The company pays principal and accrued interest in cash.	Rare at seed stage, because the cash is usually not there. Where it does happen it is normally a company that has become profitable.
Default	The company can neither repay nor persuade holders to extend.	The note holders are creditors. Depending on the terms and the jurisdiction, this can trigger acceleration or force a wind-down.

Which of these applies depends entirely on the drafted terms and on the relationship. Nothing here is a prediction about any particular note.

Convertible note versus SAFE

Y Combinator published the SAFE in 2013 explicitly to strip the debt features out of seed investing, and it worked: the SAFE is now the default first instrument in US startups. The note has not disappeared. It is still standard in many markets outside the US, it is the usual shape of a bridge financing between priced rounds, and some investors simply want a maturity date.

Convertible note versus SAFE

Convertible note versus SAFE
Feature	Convertible note	SAFE
Legal character	Debt — a promissory note	Contractual right to future equity
Interest	Accrues, normally converts into shares	None
Maturity date	Yes — creates a repayment right	None
Balance sheet treatmentConfirm classification with your accountant — it depends on the terms and the framework.	Liability until it converts	Fact-specific; commonly presented outside liabilities
Valuation cap and discount	Both available	Both available; not combined in YC forms
Pro rata rights	Often inside the note or a side letter	Separate side letter
Documentation burden	Note plus purchase agreement	One short document
Leverage if no round happens	Investor can demand repayment	Nothing forces an outcome

Comparing the standard shape of each instrument as of August 2026. Individual documents vary; read yours.

The conversion arithmetic is identical in both cases once you have a balance and a price, so everything in /equity/safe-note about caps, discounts and the pre-money versus post-money distinction applies here too. The difference is what happens when nothing happens.

What notes do to a cap table

Until a note converts, the shares it will become do not exist. That makes it easy to run a cap table that is quietly wrong: the ownership percentages on the screen are the percentages that would apply if the notes vanished, which they will not. Any serious model shows a converted view alongside the issued view, and shows it at more than one assumed round price, because the note's share count moves with that price whenever the discount governs.

The second thing to model is the interaction with the option pool. A Series A investor asking for a pool created before the round is asking every pre-round holder — founders, note holders, existing employees — to pay for it. The mechanics are in /equity/pre-money-vs-post-money, and they are worth understanding before you agree a cap, because the effective price you are giving away is lower than the headline number suggests.

Convertible note questions

What interest rate is normal on a convertible note?

There is no legally fixed rate, and quoting a market average would be inventing a statistic. What matters more than the number is that the interest accrues rather than being paid in cash, converts into shares along with the principal, and is subject to state usury limits that a lawyer should check for your jurisdiction.

Does interest on a convertible note get paid in cash?

Usually not. In the standard structure the accrued interest is added to the principal and converts into shares at the same price. In the worked example above, 18 months of 5% simple interest on $500,000 is $37,500, which bought 46,875 additional shares at the $0.80 cap price.

What happens if a convertible note reaches maturity without a round?

The note becomes repayable and the parties have to agree what to do. The common outcomes are an extension, conversion at the cap, or conversion at a negotiated price. Cash repayment is rare at seed stage. The specific rights on default are whatever the document says, so read it before the date arrives.

Is a SAFE better than a convertible note?

Better for whom. A SAFE is shorter, cheaper to paper, and has no maturity date to manage — which is why founders prefer it. A note gives the investor a repayment right and accruing interest, which is why some investors insist on one. Neither is safer in any absolute sense; they allocate risk differently.

Do convertible notes dilute founders more than equity?

They dilute later rather than less. A note converts at a cap or a discount, which by design gives the holder more shares per dollar than the priced-round investors get. If the company appreciates a lot between the note and the round, that gap is large — which is the point of the instrument.

Can a convertible note convert into common stock instead of preferred?

Yes, if the document provides for it — this is common in maturity and change-of-control provisions where there is no new preferred series to convert into. Converting into common rather than preferred means giving up the liquidation preference and protective provisions the preferred would have carried.

Sources

Safe financing documents and user guide — Y CombinatorSource for the 2013 introduction of the SAFE as a replacement for convertible notes in seed rounds.Checked 11 Aug 2026
Model legal documents — National Venture Capital AssociationThe priced-round documents a note converts into, including the certificate of incorporation that creates the preferred series.Checked 11 Aug 2026
Delaware General Corporation Law, subchapter V (stock and its classes) — Delaware Code OnlineSection 151 governs the preferences and rights a converting note ends up holding.Checked 11 Aug 2026

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