Convertible Notes: Still Used, Mostly Replaced by SAFEs

Convertible Notes for Startups

A convertible note is short-term debt that converts to equity at the next priced round. It carries an interest rate and a maturity date — the two features SAFEs removed. In 2026, most US pre-seed founders use SAFEs; notes still show up in international deals and unusual situations.

How a convertible note works

Investor lends money. It accrues interest (usually 4-8% annual). At the next priced round it converts to preferred stock, typically at a discount to that round's price and capped by the valuation cap. If no round happens by maturity, the note is either extended, converted at maturity terms, or repaid.

Note vs. SAFE

SAFE: no maturity, no interest, simpler doc, favored by investors comfortable with founder-friendly terms. Note: has maturity date and interest, more familiar to non-YC investors and non-US investors. For US pre-seed, SAFE is default. Outside US, notes often still standard.

Key terms to negotiate

Valuation cap (highest cap that converts to lowest ownership for investor). Discount rate (typically 15-25%). Interest rate (typically 4-8%). Maturity date (typically 18-24 months). Conversion mechanics on qualified financing.

What can go wrong

Notes stacking without conversion cause a mess in the next round (multiple caps, multiple discounts). Maturity dates creating pressure to raise. Interest accruing to non-trivial dilution over 2+ years. Track every note carefully.

Frequently asked questions

Should we use a note or a SAFE?

US pre-seed: SAFE, almost always. International or non-tech investor: note, likely. When mixing investors, don't mix instruments — pick one.

What happens at maturity if no round?

Depends on the note. Some auto-convert at cap. Some become repayable on demand. Read the maturity clauses carefully — this is where founders get caught off-guard.

Do notes count as debt on the balance sheet?

Yes, until conversion. This matters for later bank loans and some enterprise contracts that require clean debt reports.

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