A convertible note is a short-term debt instrument used in early-stage startup funding. It starts as a loan (with interest) but is designed to convert into equity at the next priced funding round, at a discount to that round's price or subject to a valuation cap.
Convertible note vs [SAFE note](/glossary/safe-note)
| | Convertible Note | SAFE Note | |---|---|---| | Instrument | Debt | Not debt or equity | | Interest | Yes (typically 4–8%) | No | | Maturity date | Yes (12–24 months) | No | | Default risk | Yes (if not converted) | No |
The key risk in a convertible note is the maturity date: if the company hasn't raised a priced round by maturity, the note is technically in default and the investor can demand repayment. SAFEs avoid this by having no maturity.
Why it matters for unlisted shares
Convertible notes that haven't yet converted appear as debt on the balance sheet, not equity. When they do convert, existing shareholders are diluted. Check a company's outstanding notes before buying — undisclosed pending conversions can surprise existing holders.
Example: A startup had ₹4 crore in convertible notes outstanding. At Series A, these converted at a 20% discount, creating additional dilution for all existing ordinary shareholders beyond what the new round itself caused.