Instruments
Convertible note
Also called Convertible loan note, CLN
A short-term loan to a startup that is intended to convert into shares at the next priced round rather than be repaid, usually with an interest rate, a maturity date, a cap and a discount.
In plain English
A convertible note is genuinely a loan. It has a principal, an interest rate — commonly in the mid single digits — and a maturity date, typically twelve to twenty-four months out. The interest is almost never paid in cash; it accrues and converts into shares alongside the principal, so a note that has run for two years converts on a slightly larger number than you wired.
The maturity date is the feature that distinguishes it from a SAFE, and it cuts both ways. It gives you a moment at which something must happen: repayment, conversion at a fallback valuation, or an extension you agree to grant. In practice a startup that reaches maturity without raising is a startup that cannot repay, so the real function of the date is to force a conversation. Investors who have been through it will tell you that the conversation is more useful than the theoretical right to demand cash from a company that has none.
Because a note is debt, it ranks ahead of shareholders if the company is wound up. This sounds like meaningful protection and rarely is: a failed startup usually has employees, tax authorities and trade creditors ahead of you, and very little left over. Treat the seniority as a small consolation rather than a reason to prefer the instrument.
Notes were the default seed instrument everywhere until the SAFE displaced them in the United States. They remain the norm in much of Europe and Asia, and they are still the right answer whenever a jurisdiction's company law makes a SAFE-style promise awkward to enforce.
What it means for your cheque
For an angel the note's advantage over a SAFE is that time is on your side rather than nobody's. Accruing interest slowly increases your conversion amount, and the maturity date guarantees you a seat at a renegotiation if things drift. Neither is worth much on its own, but together they are the reason a number of experienced angels still ask for a note when given the choice.
The disadvantage is complexity that a small cheque cannot afford to police. Notes have amendment provisions that let a majority of noteholders — by principal, which means the largest investor — change the terms for everyone. If a lead holds 70% of the note principal, that lead can agree to an extension or a lower cap and bind you to it. Read the amendment clause and know who the majority holder is.
Do the arithmetic
A £20,000 note at 6% with a £4m cap and a 20% discount
You lend £20,000 on a two-year note. The company raises a priced round twenty-four months later at a £10m pre-money valuation. The note converts on the better of the cap or the discount.
| Principal | £20,000 |
|---|---|
| Interest accrued at 6% simple over 2 years | £2,400 |
| Conversion amount | £22,400 |
| Price under the 20% discount | 80% of £10m = an £8m effective valuation |
| Price under the £4m cap | £4m effective valuation |
| The cap wins — your stake | £22,400 ÷ £4,000,000 = 0.56% |
| What the discount alone would have bought | £22,400 ÷ £8,000,000 = 0.28% |
The cap is worth exactly twice the discount here, and the interest added £2,400 of conversion value for doing nothing. When a note offers both, you convert on whichever gives you more shares — check that the document actually says so.
At the table
What to negotiate
- Confirm the note converts on the better of cap and discount, not on the discount alone. The phrase you want is "the lower of" applied to the conversion price.
- Check whether interest is simple or compounding, and whether it converts or is repaid. Simple interest that converts is standard.
- Read the amendment clause and ask who holds the majority of the note principal — that investor can rewrite your terms.
- Ask what happens at maturity if no round has closed. A conversion at a stated fallback valuation is better for you than an automatic extension.
- Establish whether a sale of the company triggers a repayment multiple. Some notes pay 1.5× or 2× principal on an early acquisition, which is genuinely valuable.
Around the world
How this differs by market
Largely displaced by the SAFE at seed, though still used for bridge financings between priced rounds.
LATAMCommon at the local entity where a SAFE would be hard to enforce under domestic company law.
EUStill the mainstream instrument. UK notes need care if SEIS/EIS relief matters, since relief attaches to shares rather than debt.
APACThe default in Japan and Korea, and widely used in India where it interacts with foreign-investment rules — take local advice.
Convertible note: common questions
Does the interest on a convertible note get paid in cash?
What actually happens when a note matures and the company has not raised?
Is a convertible note safer than a SAFE?
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