A convertible note is a short-term debt instrument used in early-stage fundraising that converts into equity at a future priced round. Like a SAFE, it allows a startup to raise capital without setting a valuation immediately — but unlike a SAFE, it is structured as debt with an interest rate and a maturity date. The debt structure gives investors stronger legal protections in default scenarios but adds complexity for founders.

Convertible notes typically carry an interest rate of 4–8% per year and a maturity date of 12–24 months. If a priced round doesn't occur before maturity, the note may be repaid in cash, extended by mutual agreement, or converted into equity at a default valuation specified in the note's terms. The maturity scenario is a potential source of founder-investor friction: a company that hasn't raised a priced round by the maturity date may not have the cash to repay, putting founders in a difficult negotiating position with their earliest investors.

Like SAFEs, convertible notes usually include a valuation cap and/or a discount rate that rewards early investors when the note converts. The accrued interest also converts to equity at the next round, effectively giving investors a small bonus on top of their original principal. A $250K note at 6% interest converting after 18 months adds about $22,500 of accrued interest to the conversion balance — a meaningful number when multiplied across the note holders.

Convertible notes were the dominant early-stage instrument before SAFEs became widespread in 2014–2016. They are still commonly used in three contexts: international markets (where SAFE legal frameworks haven't been standardized to the extent they have in US Delaware corporations), investor-led rounds (where the lead investor prefers the additional legal protections debt provides), and bridge rounds (between priced rounds, where a debt structure makes the temporary nature of the instrument explicit). They are also more common in deeptech and biotech, where longer development cycles make the maturity risk more significant and investor protections more valuable.

The key trade-off founders weigh when choosing between a SAFE and a convertible note: SAFEs are simpler and faster but offer no investor legal protections in default; notes are more complex but provide investors with creditor rights if the company fails before conversion. In practice, most US-based early-stage rounds use SAFEs because the difference rarely matters and the simplicity is worth more. Some institutional pre-seed funds still require notes for portfolio consistency or compliance reasons.

From a cap table modeling perspective, convertible notes behave similarly to SAFEs at conversion. The accrued interest creates additional shares at the same conversion terms, so the modeling math just includes the interest pool. Both Carta and Pulley handle note conversions natively, including modeling under different priced-round valuation scenarios.