A simple promissory note is a debt instrument, not an equity investment. Use it only for specific scenarios like insider bridge rounds or founder loans. Avoid short maturity dates, demand clauses, and secured notes, and always get legal review to prevent catastrophic mistakes.
Key takeaways
- Use simple promissory notes for bridge loans from insiders, not for main funding rounds.
- Insist on a maturity date of at least 12-18 months to avoid a cash crisis.
- Never agree to a 'demand' note or a 'secured' note that pledges company assets.
- Keep interest rates simple, typically between 4-8% annually.
- Always have a lawyer review any debt instrument, no matter how simple it seems.
- Model the full repayment cost (principal + interest) before you sign.
Before you sign anything called a “promissory note,” you need to understand the single most important distinction: are you taking on debt or selling future equity?
A Simple Promissory Note is a loan. It’s an IOU. You borrow money, and you owe that money back with interest by a specific date. The lender does not get ownership in your company. This is pure debt.
A Convertible Instrument (like a SAFE or Convertible Note) is a path to ownership. An investor gives you cash now, and that “investment” converts into company stock during a future funding round.
Startups should almost always raise capital using convertible instruments or priced equity. A simple promissory note is a niche tool for very specific, temporary situations. Confusing the two is a classic—and sometimes fatal—founder mistake.
This guide is about the simple promissory note : when to use this debt instrument, and how to do it without accidentally bankrupting your company.
A promissory note is not a tool for raising a primary funding round (Pre-Seed, Seed, Series A). Using it for that purpose signals to sophisticated investors that you don’t know what you’re doing. It’s a specific tool for a specific job.
This is the most common and legitimate use case. You have a term sheet for your next round, or a lead investor is deep in diligence and has given a verbal commit. But closing the round will take another 2-4 months, and you only have 6 weeks of runway left.
Your existing investors, who are motivated to protect their current investment, might offer a “bridge loan” to get you to the closing. A promissory note is a fast, simple way to document this short-term financing from friendly insiders.
Typical Amount: $100k - $500k, or whatever covers 3-6 months of burn.
Source: Existing investors who have a vested interest in the company’s survival.
You need to put $50,000 of your own money into the company to make payroll. A promissory note is a clean way to document that the company owes you, the individual, that money…
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Frequently asked questions
- Promissory Note vs. SAFE: What's the difference?
- A promissory note is a debt instrument (a loan with a repayment date). A SAFE (Simple Agreement for Future Equity) is a warrant-like instrument that converts into equity in a future funding round and is not debt.
- Promissory Note vs. Convertible Note: Aren't they the same?
- No. A simple promissory note is just a loan. A convertible note is a loan that is designed to convert into equity at the next funding round, containing specific terms for valuation caps and discounts.
- What is a standard interest rate for a startup promissory note?
- A simple annual interest rate between 4% and 8% is standard for an unsecured bridge loan from insiders. Much higher could be considered predatory; much lower could have tax implications.
- What happens if my startup can't pay back the note on the maturity date?
- The company enters a state of 'default.' The note's default provisions kick in, which could mean a higher interest rate or legal action. The best course is to proactively communicate with the lender and negotiate an extension *before* you default.
