Convertible notes: debt that turns into equity

• Interest rate. Typically 4% to 8% a year; median about 7% in Osler's 2025 data. It accrues and usually converts with the principal.
• Maturity date. Typically 12 to 24 months; median about 24. The date the note comes due if it hasn't converted.
• Discount. Typically 15% to 25%, most often 20%, off the price new investors pay.
• Valuation cap. The maximum valuation used for conversion. The note converts at whichever price is lower: the cap price or the discounted round price.
• Qualified financing. The size of priced round that triggers automatic conversion. It is usually a fixed dollar amount; Cooley GO describes it as typically one to two times the amount raised on notes.

You raise $500,000 on a note with 6% simple interest, a 20% discount and an $8M valuation cap. Eighteen months later you close a seed round at $2.00 per share, with 10 million shares outstanding before the round.

• Amount converting: $500,000 plus 18 months of 6% interest ($45,000) = $545,000.
• Discount price: $2.00 less 20% = $1.60 per share.
• Cap price: $8M ÷ 10 million shares = $0.80 per share.
• Conversion: the lower price, $0.80, applies, so the note converts into $545,000 ÷ $0.80 = 681,250 shares.

The cap did the work here because the round priced the company well above $8M. Exact mechanics, such as which shares count in the cap calculation, are set by your note's wording, so model it with your lawyer's final draft.

If the note reaches maturity before a qualified financing, its terms decide what happens: it may become repayable, convert at the holder's option, or convert automatically at a set valuation. Most early-stage companies can't repay in cash, so the usual path is to ask holders to extend the maturity date, often with the consent of a majority of note holders. Start that conversation well before the date, with a clear plan for the round that will convert the notes.

If the company is sold before the note converts, most notes give the holder a choice set out in the note: repayment of principal and interest, often with a premium such as 1.5 to 2 times the principal, or conversion at the cap just before the sale. Check your note's wording, because it decides how much of the sale price goes to note holders.

Until it converts, a note is a liability on your balance sheet with interest accruing. Investors, lenders and auditors will see it as debt, which matters if cash runs low or you are negotiating venture debt.

• Investors who want debt protections. A note ranks as debt until it converts and can come due.
• Bridge rounds. Existing investors often bridge to the next round on notes.
• Local practice. Some investor groups and markets still default to notes.

Accrued interest adds to the shares issued at conversion, and the maturity date can give note holders leverage in a slow fundraise. Weigh both against the simplicity of a SAFE.