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ARTICLE · 02 MARCH 2022

What Is A Convertible Note?

Shulman Rogers
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"Debt or equity?" That is the question many early stage founders face when raising capital. While SAFEs may be the instrument of choice for many early stage companies today...

United StatesFinance and Banking
Lawrence R. Bard
Lawrence R. Bard
Hunter Haines
Hunter Haines

"Debt or equity?" That is the question many early stage founders face when raising capital. While SAFEs1 may be the instrument of choice for many early stage companies today, some investors still prefer a traditional convertible note. A convertible note is a debt instrument that needs to be repaid-typically through cash or shares of a company. Convertible notes are a way for seed investors to invest in a company, usually startups, that are not ready to place a valuation on the company. Or to define in lay terms, a convertible note is a type of debt that converts into equity when a startup reaches an agreed-upon milestone. This milestone is usually the company's next equity financing (e.g., priced funding round).

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