Convertible Note Template 2025
Professional convertible note template with comprehensive guide. Learn what a convertible note is, how to fill it out, and download our template designed by legal experts for startup fundraising and bridge financing.
Download TemplateWhat is a Convertible Note?
A convertible note is a short-term debt instrument that converts into equity during a future financing round. It allows investors to loan money to a startup with the option to convert that debt into ownership shares at a later date, typically when the company raises additional funding at a predetermined valuation.
Convertible notes provide a flexible financing solution for early-stage startups by allowing them to raise capital quickly without immediately determining company valuation. This "bridge financing" helps startups fund operations while preparing for larger funding rounds where valuation can be more accurately assessed.
๐ Key Components of a Convertible Note
- Principal amount - the investment sum
- Interest rate - annual rate accrued on the debt
- Maturity date - when the note becomes due
- Conversion discount - price reduction for early investors
- Valuation cap - maximum conversion valuation
- Conversion triggers - events that cause automatic conversion
- Investor rights - information and governance protections
How Convertible Notes Work
The Conversion Process
- Initial Investment: Investor loans money to startup under convertible note terms
- Interest Accrual: Note accrues interest over time (typically 4-8% annually)
- Qualifying Financing: Company raises Series A or qualifying funding round
- Automatic Conversion: Note converts to equity shares in the new financing
- Price Calculation: Conversion price determined by discount and/or cap
Conversion Price Calculation Example
Scenario: $100,000 convertible note with 20% discount and $5M valuation cap
Series A Price: $2.00 per share ($8M pre-money valuation)
Discounted Price: $2.00 ร 80% = $1.60 per share
Capped Price: $5M cap รท shares outstanding = $1.25 per share
Conversion Price: Lower of $1.60 or $1.25 = $1.25 per share
Shares Received: $100,000 รท $1.25 = 80,000 shares
Benefits for Startups
- Quick Fundraising: Faster than equity rounds, simpler documentation
- Valuation Delay: Avoid setting valuation before achieving milestones
- Lower Legal Costs: Less expensive than priced equity rounds
- Founder Control: No immediate dilution or new board members
- Bridge Financing: Funds operations while preparing for larger rounds
Benefits for Investors
- Conversion Upside: Potential equity participation in future growth
- Downside Protection: Debt instrument with interest if no conversion
- Early Investor Benefits: Discounts and caps reward early investment
- Simplified Process: Faster investment with less due diligence
- Pro Rata Rights: Option to participate in future funding rounds
Convertible Notes vs. Equity vs. SAFE Comparison
Feature | Convertible Note | Equity Round | SAFE |
---|---|---|---|
Instrument Type | Debt that converts to equity | Direct equity purchase | Future equity agreement |
Interest Rate | Yes (4-8% typical) | No | No |
Maturity Date | Yes (12-24 months typical) | No | No |
Immediate Valuation | No | Yes | No |
Legal Complexity | Medium | High | Low |
Time to Close | 2-4 weeks | 2-4 months | 1-2 weeks |
Board Rights | Limited/Information only | Yes, full governance | Limited/Information only |
โ When to Use Each Instrument
- Convertible Note: Need bridge financing, established company with track record
- Equity Round: Ready for full valuation, need significant capital, want investor governance
- SAFE: Very early stage, want simplest terms, prefer Y Combinator standard
Key Terms and Provisions
Critical Economic Terms
- Principal Amount: The dollar amount invested (e.g., $25K, $100K, $500K)
- Interest Rate: Annual rate, typically 4-8%, simple or compound interest
- Conversion Discount: 10-25% discount to next round price for early investors
- Valuation Cap: Maximum valuation for conversion, protecting against high Series A valuations
- Maturity Date: 12-24 months from issuance, when note becomes due
Conversion Mechanics
- Qualified Financing: Minimum financing amount triggering automatic conversion (e.g., $1M+)
- Voluntary Conversion: Company or investor option to convert before maturity
- Conversion Price: Lower of discounted price or capped price
- Interest Treatment: Whether accrued interest converts to equity or remains as debt
- Security Type: Preferred stock, common stock, or same as new investors
Investor Protections
- Information Rights: Regular financial reports and company updates
- Pro Rata Rights: Right to participate in future financing rounds
- Anti-Dilution: Protection against down rounds or dilutive events
- Most Favored Nation: Right to benefit from better terms given to future investors
- Change of Control: Rights and protections in acquisition scenarios
โ ๏ธ Common Term Negotiations
- Discount vs. Cap: Investors prefer both; startups may offer one or the other
- Qualified Financing Threshold: Higher thresholds favor companies, lower favor investors
- Maturity Events: What happens if no qualified financing occurs by maturity
- Interest Rates: Balance between investor returns and company burden
- Subordination: Priority in liquidation scenarios
How to Fill Out a Convertible Note: Step-by-Step Guide
Define: Complete identifying information for the company and investor, including legal entity details and contact information.
- Company's full legal name and state of incorporation
- Investor's full legal name and address
- Company's principal business address
- Authorized company representatives
- Date of note issuance and execution
Establish: Define the investment amount, interest rate, and how interest will be calculated and treated.
- Principal investment amount in dollars
- Annual interest rate (typically 4-8%)
- Simple vs. compound interest calculation
- Interest payment schedule (if any)
- Treatment of accrued interest at conversion
Specify: Establish the conditions, pricing, and mechanics for converting the debt to equity.
- Qualified financing threshold amount
- Conversion discount percentage
- Valuation cap amount (if applicable)
- Automatic vs. optional conversion triggers
- Type of securities to be received upon conversion
Establish: Define when the note becomes due and what happens if it doesn't convert before maturity.
- Maturity date (typically 12-24 months)
- Repayment terms if note reaches maturity
- Extension options and procedures
- Default provisions and remedies
- Prepayment rights and restrictions
Add: Define the rights and protections that investors will receive during the note period and after conversion.
- Information rights and reporting requirements
- Pro rata participation rights in future rounds
- Most favored nation provisions
- Anti-dilution protections
- Tag-along and drag-along rights
Include: Add provisions for special events, legal protections, and administrative requirements.
- Change of control and acquisition provisions
- Dissolution and liquidation scenarios
- Governing law and dispute resolution
- Representations and warranties
- Amendment and waiver procedures
โ ๏ธ Legal and Tax Considerations
Convertible notes involve complex legal, tax, and securities law issues. Interest payments may be required for tax purposes even if deferred. Securities laws may require exemptions or registrations. Always engage qualified legal counsel experienced in startup financings to ensure compliance and protect your interests.
Valuation Cap vs. Discount: Strategic Analysis
How Each Mechanism Works
Mechanism | Purpose | Calculation | Investor Benefit |
---|---|---|---|
Conversion Discount | Reward early investment timing | Series A price ร (100% - discount%) | Lower price than Series A investors |
Valuation Cap | Limit maximum conversion valuation | Cap valuation รท total shares outstanding | Protection against high valuations |
Scenario Analysis: $100K Note with 20% Discount and $5M Cap
Scenario 1: Series A at $3M Pre-Money (Cap Irrelevant)
- Series A Price: $0.75/share
- Discounted Price: $0.60/share
- Conversion Price: $0.60/share (discount applies)
- Ownership: 166,667 shares
Scenario 2: Series A at $8M Pre-Money (Cap Relevant)
- Series A Price: $2.00/share
- Discounted Price: $1.60/share
- Capped Price: $1.25/share
- Conversion Price: $1.25/share (cap applies)
- Ownership: 80,000 shares
Scenario 3: Series A at $15M Pre-Money (Cap Highly Relevant)
- Series A Price: $3.75/share
- Discounted Price: $3.00/share
- Capped Price: $1.25/share
- Conversion Price: $1.25/share (cap provides major benefit)
- Ownership: 80,000 shares
Strategic Considerations
- Market Stage: Early markets may favor caps; mature markets may favor discounts
- Valuation Trajectory: High-growth companies benefit investors more with caps
- Investor Sophistication: Experienced investors typically require both mechanisms
- Company Leverage: Hot companies may negotiate single mechanism or lower terms
- Round Size: Larger notes typically command better terms
๐ก Market Standard Terms (2025)
- Conversion Discount: 15-25% (20% most common)
- Valuation Cap: 2-5x current valuation estimate
- Interest Rate: 4-8% (6% most common)
- Maturity: 18-24 months (24 months most common)
- Qualified Financing: $1M-$5M threshold
Common Mistakes to Avoid
๐ซ Top 12 Convertible Note Pitfalls
- Excessive valuation caps: Setting caps too low relative to company progress
- Short maturity periods: Insufficient time to achieve conversion milestones
- High interest rates: Burdensome rates that hurt cash flow if notes don't convert
- Unclear conversion mechanics: Ambiguous language about conversion price calculations
- Missing qualified financing definition: Unclear threshold amounts or conditions
- Inadequate maturity provisions: No clear plan for notes that reach maturity
- Overly generous investor rights: Rights that interfere with operations or future fundraising
- Poor legal documentation: Using generic templates without proper customization
- Securities law non-compliance: Failing to comply with federal and state securities regulations
- Tax implications oversight: Not considering imputed interest or other tax consequences
- Multiple note coordination: Inconsistent terms across different investors
- Due diligence shortcuts: Inadequate vetting of investors or terms
Frequently Asked Questions
Convertible notes are debt instruments with interest rates and maturity dates, while SAFEs (Simple Agreement for Future Equity) are not debt and have no interest or maturity. SAFEs are simpler and faster to execute, while convertible notes provide more downside protection for investors through their debt structure.
Most sophisticated investors expect both mechanisms. The discount rewards early investment timing, while the cap protects against high future valuations. The investor gets the better of the two at conversion, providing comprehensive protection for their early-stage risk.
Options typically include: (1) repaying the note with interest, (2) extending the maturity date, (3) converting at a predetermined valuation, or (4) negotiating new terms. Many notes include automatic conversion provisions or give investors the choice of conversion or repayment.
Raise enough to achieve milestones that will support a higher valuation in your next equity round, typically 12-18 months of runway. Common amounts range from $100K-$2M for seed stage companies, though this varies significantly by industry and business model.
Yes, you can issue multiple convertible notes with identical terms, or create a single note with multiple investors. Ensure consistent terms across all notes to avoid complications. Consider using a convertible note purchase agreement for multiple investors investing simultaneously.
Common exemptions include Rule 506(b) and 506(c) under Regulation D, allowing sales to accredited investors. Rule 506(b) allows up to 35 non-accredited investors with sophistication requirements. State securities laws may also apply. Always consult securities counsel.
Set the cap at 2-5x your current estimated valuation, based on comparable companies, recent transactions, and growth trajectory. Consider your expected valuation at the next funding round and ensure the cap provides meaningful upside for investors while remaining reasonable for the company.
Standard rights include quarterly financial statements, annual budgets, and notice of major corporate events. Avoid giving extensive governance rights that could complicate operations. Information rights should be proportional to investment size and investor sophistication.
Download Your Convertible Note Template
Our comprehensive convertible note template includes all the essential provisions and terms you need to structure successful startup financing. This template has been crafted by experienced startup attorneys and is suitable for various funding scenarios and investor types.
๐ What's Included in Your Template:
- Complete convertible note agreement in Word and PDF formats
- Alternative provisions for discount-only and cap-only structures
- Comprehensive conversion mechanics and trigger events
- Standard investor protection and information rights
- Maturity and repayment provisions for various scenarios
- Securities law compliance guidance and exemption references
- Term sheet template for negotiating key provisions
๐ Why Choose Our Template?
- Startup Attorney Approved: Crafted by experienced startup and venture capital lawyers
- Market Tested: Used by successful startups and investors across industries
- Regularly Updated: Kept current with market terms and legal developments
- Multiple Scenarios: Provisions for various funding situations and investor types
- Investment Grade: Professional documentation suitable for institutional investors
- Educational Resources: Comprehensive guides and term explanations included
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