Convertible Notes Explained: What They Are, How They Work, and When to Use One

Before the SAFE existed, the standard way to raise early money without setting a valuation was the convertible note. In the US it has since been comprehensively overtaken: convertible notes fell to a record low of 7% of pre-seed rounds in Q1 2026, against 93% for SAFEs, according to Carta. It is far from dead, though. Notes remain the better fit in specific situations, and across much of Africa, where debt is a far larger part of the funding mix, they are still widely used.

This post explains how convertible notes work. It pairs with the guide to SAFEs, and SAFE vs convertible note vs priced round sets out which to use.

What a convertible note is

A convertible note is a short-term loan from an investor to a startup, structured so that instead of being repaid in cash, it converts into shares at the company’s next priced round. The investor lends the money expecting to become a shareholder rather than to be repaid.

Because it is debt, a note behaves like a loan until it converts. It has a principal, it accrues interest, and it has a maturity date by which something must happen. It sits on the company’s balance sheet as a liability until it converts, which investors see when they examine the accounts in diligence. A SAFE, not being debt, does not. That status as debt, with a deadline attached, gives the investor more protection and the founder more pressure than a SAFE does.

The four terms that define a note

A convertible note shares two levers with a SAFE and adds two that come from its nature as a loan.

The valuation cap. As with a SAFE, the maximum valuation at which the note converts. If the priced round values the company above the cap, the note converts at the cap, rewarding the early investor with more shares.

The discount. The note converts at a percentage below the price new investors pay, typically 10 to 20%. Where a note has both a cap and a discount, the investor gets whichever is more favourable to them.

The interest rate. As a loan, a note accrues interest, typically 4 to 8% a year, with a median around 7% (Carta). The interest is rarely paid in cash. It accrues and then converts into additional shares at the priced round, so it increases the investor’s equity and the founder’s dilution rather than costing cash.

The maturity date. The deadline, usually 18 to 24 months and sometimes up to 36, by which the note must convert or be dealt with. It is the most important difference from a SAFE, covered below.

A worked example

An investor lends you 300,000 dollars on a convertible note with a 6 million dollar cap, a 20% discount and 7% annual interest. Eighteen months later, you raise a priced seed round at an 8 million dollar valuation.

• First, the interest. 7% a year for 18 months adds roughly 31,500 dollars, so about 331,500 dollars of value converts.
• Then the conversion price. The round is at 8 million, above the 6 million cap, so the note converts at the cap. The cap (6 million) is more favourable to the investor than a 20% discount off the 8 million round (which would imply 6.4 million), so the cap applies.
• Converting 331,500 dollars at a 6 million valuation gives the investor roughly 5.5% of the company, more than the 300,000 principal alone would suggest, because the interest converted into equity too.

The interest has done real work here: it increased the investor’s stake without the founder writing a cheque.

The maturity date is a real deadline

The maturity date is what makes a note riskier for founders. If the note reaches maturity and you have not raised a priced round, the loan falls due, and in principle the investor could demand repayment in cash. Most early startups cannot repay, which is what makes the position dangerous.

In practice investors usually extend the maturity or agree to convert on pre-set terms, because a dead company repays nothing. That is a convention, not a guarantee, and building a plan on an investor’s goodwill is a weak position. Treat the maturity date as a real deadline: the date by which you must have raised the next round, managed against your runway and fundraising timeline from the day you sign. It matters more in African markets, where the step from seed to Series A can take longer; an 18-month note in a market where the next round often takes two years is a deadline you may struggle to meet.

When a note still beats a SAFE

Notes are niche in the US, but three situations still favour them:

• Your investors are outside the US. International and local investors, including many across Africa, Europe and the Middle East, are often more comfortable with debt than with the US-born SAFE, whose legal standing is less settled in their jurisdiction. A note the investor’s lawyers already understand may close faster than a SAFE they have to be taught.
• Your sector leans on notes. US data shows biotech, medical devices and energy still use convertible notes more heavily than other sectors, often for fund-accounting reasons on the investor’s side.
• You want a built-in deadline. Some founders value the maturity date as a forcing function that keeps everyone focused on the next round. A SAFE has no equivalent pressure.

The African context

Convertible notes are often more familiar to African lawyers, angels and local funds, because they predate the SAFE and map onto conventional loan documentation that local legal systems already understand. The shape of the market reinforces that: in 2025, debt financing reached a record 1.64 billion dollars, 41% of all African tech capital, per Partech. This is a debt-comfortable market. Two cautions apply. First, because notes accrue interest and most African early rounds are dollar-denominated, a weakening local currency makes the dollar debt, and the eventual dilution, heavier in local terms, so the currency discipline matters here too. Second, take the maturity date seriously where the next round can take longer to raise.

Common convertible note mistakes

• Forgetting the interest converts to equity. It is extra dilution rather than a cash cost. Include it in the conversion model.
• Underestimating the maturity date. Treat it as a hard fundraising deadline, not a formality.
• Stacking notes with different caps and dates. Multiple notes with inconsistent terms create a messy conversion. Keep them consistent and tracked.
• Assuming investors will always extend. They usually do, but do not build the plan on their goodwill.

A convertible note is a proven, flexible way to raise early money, with more protection for the investor and more pressure on the founder. It has lost the US default to the SAFE, and it remains a sensible choice for the right investor, the right sector, and much of the African market. Weigh it against the alternatives in SAFE vs convertible note vs priced round, and see where it fits in the full funding journey.