Convertible notes

A convertible note is a loan that is designed to turn into equity later. Before Y Combinator's SAFE became the US seed default, notes were early fundraising. They still matter: bridges, some non-US markets, and any deal where an investor wants debt seniority until conversion.

The investor wires cash today. You owe principal plus interest. A qualified financing converts the note into preferred at a discount and/or cap. If no financing arrives by maturity, you extend, convert, repay or default.

Concept

A note is a liability until it converts. A standard YC SAFE is a contractual right to future equity with no interest and no maturity. In a dissolution or sale before conversion, debt is typically paid before equity — including before SAFE holders.

Step	Concept	What it answers
1	Convertible note terms	What do principal, interest, cap, discount and the trigger mean?
2	Note conversion math	How many shares does a $500k note buy at Series A?
3	Note maturity	What happens if the priced round does not arrive?

Notes vs SAFEs vs priced equity

Dimension	Note	SAFE	Priced preferred
Form	Debt	Convertible equity contract	Equity now
Interest	Yes	No	N/A
Maturity	Yes	No (YC form)	N/A
Speed / cost	Medium	Fastest / cheapest	Slowest / costliest
Ownership clarity	Fuzzy until conversion	Clear on post-money SAFE	Exact
Seniority pre-conversion	Debt (ahead of equity)	Behind debt	Preferred after close
Typical use (US, mid-2020s)	Bridges, some seeds	Pre-seed / seed default	Series A+

Bridges. Existing investors extend runway with a note while you prepare a larger round. Maturity keeps everyone honest. Details in down rounds and bridges.

Non-US markets. Local funds and counsel may still standardize on notes. Pushing a YC SAFE can slow the deal if LPs expect debt.

Investor preference for seniority. Angels who fear a soft landing sometimes want debt priority over later SAFEs.

Regulatory / product constraints. Some vehicles or banks cannot hold SAFEs cleanly.

For a clean US seed with angels and accelerators, default to post-money SAFEs unless there is a concrete reason not to. Instrument choice is part of fundraising process strategy, not just legal fashion. Prefer one early instrument family; model notes and SAFEs together if you must mix them.

As an early employee or founder, ask for a schedule of all convertibles and treat upcoming maturities as calendar risk. Interview angle: walk a cap-and-discount conversion out loud, then add interest.

Common mistakes

Stacking notes and SAFEs without a bad-outcome waterfall. Debt is ahead.
Quoting ownership without interest. The extra shares are real.
Using a note for a standard US seed just because a template was handy. You bought a maturity clock you may not want.

Key takeaways

A convertible note is debt: principal, interest, maturity, then conversion on a qualified financing.
Investors typically convert at the better of discount or cap (lower price), on an amount that usually includes interest.
Maturity is the main founder risk versus SAFEs.
Watch liquidation preference when discounted conversions turn into preferred.