Definition
Convertible notes are debt with an automatic conversion trigger. Unlike SAFEs, convertible notes have a maturity date (typically 18-24 months) and may accrue interest. GitDealFlow's signals can help note holders assess whether a startup is on track to raise its next round before maturity.
How it works in practice
A convertible note is a loan that converts into equity at a future financing. The investor lends the company money with a principal amount, an interest rate, and a maturity date, typically 18-24 months out. If the company raises a priced round before maturity, the note converts into the round's shares at a discounted price, subject to the valuation cap. If no round happens, the note comes due and must be repaid (or renegotiated).
The conversion mechanics mirror the SAFE's: the note converts at the lower of the cap-adjusted price or the discount-adjusted price, and interest usually converts into equity too, so the investor gets extra shares for the time value of their money. Because notes are debt, they sit ahead of SAFEs and equity in a liquidation: if the company fails, note holders are repaid before equity holders, a meaningful difference from SAFEs.
The maturity date is the feature that most distinguishes notes from SAFEs: it creates a deadline that can force repayment, conversion, or an extension negotiation at exactly the wrong time. Founders who choose notes should model the maturity against their fundraising timeline. GitDealFlow's data helps both sides of that timeline, its weekly email tracks commit velocity, contributor growth, and repository expansion across 350+ startups, and its SSRN research panel has documented 219 startup-period observations across 55 startups with acceleration visible 21-47 days before rounds are announced, so note holders can assess whether a round is coming before maturity.
Key points
- A convertible note is debt: principal, interest, and a maturity date.
- It converts at the next priced round, at the lower of cap or discount price.
- Interest typically converts into shares too.
- Notes rank ahead of SAFEs and equity in a liquidation.
- The maturity date creates real repayment pressure if no round happens.
Frequently Asked Questions
Convertible note vs SAFE, what's the difference?
Notes are debt with a maturity date and interest. SAFEs are not debt, they convert at the next round with no maturity. SAFEs are simpler and more founder-friendly. Both are common at seed stage.
How does a convertible note work?
An investor lends money to the company; the note accrues interest and matures in 18-24 months. If the company raises an equity round before maturity, the note converts into that round's shares at a discounted price (with a cap). If no round happens, the company must repay the principal and interest, or negotiate an extension with the note holders.
Why would an investor prefer a note over a SAFE?
Because a note is debt: it ranks ahead of SAFEs and equity in a liquidation, accrues interest, and has a maturity date that creates repayment pressure on the company. For an investor who wants downside protection and a defined timeline, those features are valuable. For a founder, they are exactly the costs that make SAFEs simpler.
What happens if a convertible note reaches maturity without a financing?
The note becomes due: the company must repay principal plus accrued interest, which is often impossible for a startup without cash. In practice, the parties usually negotiate, extending the maturity, converting early at agreed terms, or restructuring. That negotiation happens from a position of weakness for the founder, which is why maturity dates need careful planning.