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 now been comprehensively overtaken: convertible notes fell to a record low of just 7% of pre-seed rounds in Q1 2026, against 93% for SAFEs, according to Carta. But “niche” is not “dead.” Notes remain the better fit in specific situations, and in much of Africa, where debt is a far larger part of the funding mix, they are still very much in use.

This post explains how convertible notes work. It pairs with our guide to SAFEs, and if you want to know which to use, read SAFE vs convertible note vs priced round.

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 is lending you money with the clear expectation of becoming a shareholder, not of getting the cash back.

Because it is debt, a note behaves like a loan right up until it converts. It has a principal (the amount lent), it accrues interest, and it has a maturity date by which something must happen. One practical consequence: a convertible note sits on your company’s balance sheet as a liability until it converts, which investors will see when they scrutinise your accounts during diligence. A SAFE, not being debt, does not. That legal status as debt, with a deadline, gives the investor more protection and gives the founder more pressure than a SAFE does.

The four terms that define a note

A convertible note has two of the same levers as a SAFE, plus two that come from its nature as a loan.

The valuation cap. As with a SAFE, this is the maximum valuation at which the note converts. If your 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. Because it is a loan, a note accrues interest, typically 4 to 8% a year, with a median around 7% (Carta). Here is the part founders miss: that interest is rarely paid in cash. Instead, it accrues and then converts into additional shares at the priced round. So the interest quietly increases the investor’s equity and your dilution, rather than costing you cash.

The maturity date. This is the deadline, usually 18 to 24 months (sometimes up to 36), by which the note must convert or be dealt with. It is the single most important difference from a SAFE, and we come back to it 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 the note now represents about 331,500 dollars of value converting.
• Next, 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 the 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 mechanics rhyme with a SAFE, but notice the interest has done real work: it increased the investor’s stake without you ever writing a cheque.

The maturity date is a real deadline

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

In practice, investors usually do not force repayment; they extend the maturity date or agree to convert on pre-set terms, because a dead company repays nothing. But “usually” is not “always,” and relying on goodwill is a weak position. The healthy way to treat a maturity date is as a real deadline: it is the date by which you must have raised your next round, and you should manage your runway and fundraising timeline against it from the day you sign. This matters especially in African markets, where the step from seed to Series A can take longer, so 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 now, not obsolete. Three situations where they remain the better fit.

• 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. The note that your 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 focuses everyone on getting to the next round. A SAFE has no equivalent pressure.

The African context

Convertible notes are often the more familiar instrument to African lawyers, angels and local funds, simply because they predate the SAFE and map onto conventional loan documentation that local legal systems already understand. That familiarity is reinforced by the shape of the market: in 2025, debt financing hit 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 not a cash cost, it is extra dilution. Include it in your 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 your plan on their goodwill.

A convertible note is a proven, flexible way to raise early money, with a little more protection for the investor and a little more pressure on you. It has lost the US default to the SAFE, but it remains a live, 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.