Convertible note

A convertible note starts as debt but is built to become stock. An early investor lends money to a young company, and instead of being repaid in cash, the note usually converts into shares when the company raises its next priced round. Notes often carry a discount, a valuation cap, or both, which reward the early investor with shares on better terms than the later round buyers receive. They are popular at the earliest stage because they let a company raise money quickly without having to agree on a firm valuation yet.

This tool fits founders raising a first round of outside money who want to move fast and postpone the hard valuation conversation. The trade offs sit on both sides. Until the note converts it is still a debt obligation, and if no qualifying round happens it may come due in cash or convert on terms set in the agreement. For founders, the eventual conversion causes dilution, sometimes more than expected once the discount and cap are applied. Reading the conversion terms closely before signing is essential.