Convertible notes
A loan from investors that usually turns into shares at your next funding round. It puts off agreeing a valuation, but until it converts it is real debt, with interest and a repayment date.
- No security
How it works
A convertible note is a loan made by an investor to a company that can convert into a different security, usually preferred stock at the next funding round or on other agreed conditions. The SEC says they are often used in seed rounds because it is hard to value a young company.
It is debt until it converts. The investor gets a promise of repayment, interest for a period of time, and the right to convert the amount owed into equity when a trigger event happens. Unlike a SAFE, a convertible note is a current legal obligation: if the trigger never happens, the company still owes the money. Notes usually set a maturity date; what happens then (repayment, conversion or an extension) depends on the terms you agree.
Conversion terms vary. A note may convert at a discount to the next round's price or at a set maximum valuation, and the interest built up may convert too. Check exactly what triggers conversion, what price applies, and what happens if the company is sold first.
It is a security. Selling convertible notes is a securities offering, so it needs an exemption, usually Regulation D for accredited investors (with a Form D filed within 15 days of the first sale) or Regulation Crowdfunding, which also allows debt.
Upsides and downsides
Upsides
- Puts off agreeing a valuation until a priced round
- Quicker and cheaper than a priced share round
- Investors keep a claim for repayment until the note converts
Downsides
- It is debt, with interest and a maturity date
- Ownership given up is not fixed until conversion
- Terms vary and can be complex
Risks
- If the note matures without a funding round, investors can demand repayment
- Interest and discounts can make conversion more dilutive than expected
- Securities rules still apply to who you approach and how
What it costs
- How it is priced
- Interest that builds up on the loan, plus a future share of the company set by the conversion terms
- Costs that are easy to miss
- Interest that adds to the amount converting into shares
- Legal fees for the note and securities compliance
- Repayment if the note matures before it converts and investors will not extend it
Any amount investors agree; often used for seed rounds.
Raising on SAFEs or notes? SAFEs and notes in your next round: see what they take when they convert
Does it fit?
Could fit when
- You run an early-stage company that needs money before the next funding round
Unlikely to fit when
- You want to keep full ownership
- You could not repay the loan if no funding round happens before it matures
- You run a sole proprietorship or partnership
Who can use it
- Business types: C corporation, Benefit corporation, LLC, S corporation
- Open to businesses with no sales yet
- Usually for companies that expect to raise a priced equity round
- Sold under a securities exemption, such as Regulation D or Regulation Crowdfunding
Am I ready?
What a provider is likely to ask for. Tick what you have. Your ticks stay in this browser and nothing is stored. Checklist for all hybrid instruments
0%
0 of 3 ticked
- Note terms chosen
- Ownership model
- Plan for maturity
Regulation and protections
Regulators: U.S. Securities and Exchange Commission (SEC); State securities regulators.
Who runs it: Private providers, nationwide.
A convertible note is a security, so federal anti-fraud rules and the rules of the exemption you use apply. States can require notice filings and fees.
Types of provider: Angel investors and syndicates; Venture capital funds; Funding portals, for notes sold under Regulation Crowdfunding.
Also consider
What has changed
No changes since this page was published. It was last checked against its sources on October 17, 2026.
Sources
- SEC: Common startup securities (convertible notes and SAFEs) · checked October 17, 2026
- SEC Office of Investor Education and Advocacy: Investor Bulletin, Be Cautious of SAFEs in Crowdfunding (May 9, 2017; describes convertible notes) · checked October 17, 2026
- SEC: Exempt offerings (Regulation D and Form D) · checked October 17, 2026
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