What is a convertible note?

Unlike a SAFE, a note is debt: interest builds up, usually paid in shares on conversion rather than in cash, and it has a maturity date, often 12 to 24 months out. A valuation cap sets the highest company value used for conversion; a discount, often 10% to 20%, cuts the price paid; when a note has both, the holder gets whichever is cheaper. Listed companies also issue convertible notes, which work differently.

Say an investor lends $100,000 at 5% interest with a 20% discount. A year later a Series A prices shares at $1.00, so the $105,000 owed converts at $0.80 a share, into 131,250 shares. Simple example. Terms vary by fund.

It lets a young company raise money without agreeing a valuation yet, while the investor is rewarded for coming in early.