Glossary · Funding instruments · Updated 28 August 2026
A convertible note is a loan to a startup that turns into shares on a trigger event, usually the next funding round. Until it converts it remains debt: it accrues interest and must be repaid at maturity if no conversion occurs.
A convertible note sits between debt and equity. The investor holds creditor status — ranking above shareholders in a liquidation — while keeping the upside of converting the claim into shares.
Accrued interest is added to the converting amount. A €500K note at 5% over eighteen months converts €537,500, not €500,000. Over longer terms or at higher rates the effect becomes material and belongs in your cap table model.
It is the most protective instrument for the investor and the most constraining for the startup, because of maturity. If no round happens before then, the company must repay — at precisely the moment it has, by definition, failed to raise. That is why SAFEs and BSA AIRs have largely displaced it at the earliest stages.
Example: a convertible note converting
A fund lends €500K over 18 months. The startup then raises a Series A at a €10M valuation.
| Principal | €500,000 |
|---|---|
| Annual interest rate | 5% |
| Time before conversion | 18 months |
| Accrued interest | €500,000 × 5% × 1.5 = €37,500 |
| Converting amount | €537,500 |
| Discount | 20% |
| Round valuation | €10,000,000 |
| Conversion price | €10M × 80% = €8,000,000 |
| Ownership obtained | €537,500 / €8M ≈ 6.72% |
Interest alone is worth nearly half a point of extra equity compared with an interest-free conversion. Over a 24- or 36-month note the gap widens noticeably.
The common mistake
Underestimating maturity. An 18-month note means you must have raised within 18 months, or the debt falls due. In practice an extension is usually negotiated, but from a weak position and generally in exchange for a steeper discount.
Frequently asked questions
Does a convertible note dilute immediately?+
No. Until conversion it sits in liabilities, not equity. Dilution materialises on the conversion date, which is why many founders see it too late: it does not appear on the current cap table.
Should you prefer a convertible note, a SAFE or a BSA AIR?+
For a French company at pre-seed, the BSA AIR is usually simplest and least risky, since there is no repayment date. A convertible note makes sense when the investor requires creditor protection, typically as a bridge between rounds.
Related terms
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