Definition
Convertible Note
A convertible note is short-term debt that converts into equity at a future financing round, typically at a discount or valuation cap.
A convertible note is a loan to a startup that, instead of being repaid in cash, converts into shares when the next priced round occurs. It carries interest and a maturity date, and usually includes a valuation cap and/or a conversion discount that rewards the early risk. It defers valuation while giving the investor downside protection as a creditor.
In India, convertible notes are permitted for DPIIT-recognised startups under specific RBI/FEMA rules, including minimum investment amounts and conversion timelines. They are an alternative to CCPS and SAFEs for early-stage funding.
Related terms
- Bridge RoundA bridge round is interim financing that carries a startup from one major round to the next, often raised on convertible terms.
- SAFE NoteA SAFE (Simple Agreement for Future Equity) is an instrument by which an investor gives a startup money now in exchange for equity in a future priced round.
- Valuation CapA valuation cap is the maximum valuation at which a convertible note or SAFE converts into equity, protecting early investors if the startup's value soars.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.