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.

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What is a Convertible Note?

Startup founders and investors discussing convertible note financing

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.

๐Ÿ“‹ 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

Financial diagram showing convertible note conversion process

The Conversion Process

  1. Initial Investment: Investor loans money to startup under convertible note terms
  2. Interest Accrual: Note accrues interest over time (typically 4-8% annually)
  3. Qualifying Financing: Company raises Series A or qualifying funding round
  4. Automatic Conversion: Note converts to equity shares in the new financing
  5. 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

Benefits for Investors

Convertible Notes vs. Equity vs. SAFE Comparison

Comparison chart of different startup financing instruments
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

โœ… 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

Legal documents showing convertible note terms and provisions

Critical Economic Terms

Conversion Mechanics

Investor Protections

โš ๏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

Startup founder completing convertible note documentation
1
Identify the Parties and Basic Information

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
2
Set Principal Amount and Interest Terms

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
3
Define Conversion Terms and Triggers

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
4
Set Maturity Date and Repayment Terms

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
5
Include Investor Rights and Protections

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
6
Address Special Situations and Legal Terms

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

โš ๏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

Financial analysis showing valuation cap and discount scenarios

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

๐Ÿ’ก 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

Business professionals reviewing contracts to avoid legal mistakes

๐Ÿšซ Top 12 Convertible Note Pitfalls

  1. Excessive valuation caps: Setting caps too low relative to company progress
  2. Short maturity periods: Insufficient time to achieve conversion milestones
  3. High interest rates: Burdensome rates that hurt cash flow if notes don't convert
  4. Unclear conversion mechanics: Ambiguous language about conversion price calculations
  5. Missing qualified financing definition: Unclear threshold amounts or conditions
  6. Inadequate maturity provisions: No clear plan for notes that reach maturity
  7. Overly generous investor rights: Rights that interfere with operations or future fundraising
  8. Poor legal documentation: Using generic templates without proper customization
  9. Securities law non-compliance: Failing to comply with federal and state securities regulations
  10. Tax implications oversight: Not considering imputed interest or other tax consequences
  11. Multiple note coordination: Inconsistent terms across different investors
  12. Due diligence shortcuts: Inadequate vetting of investors or terms

Frequently Asked Questions

FAQ and questions about convertible notes

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

Professional startup funding documents and templates

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.

๐Ÿ“„ 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
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๐Ÿ”’ 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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