Convertible Note Template
Hand-drafted convertible note template for 2026 — covers principal, interest rate, valuation cap, discount rate, maturity and qualified financing trigger. Suitable for UK convertible loan notes and US convertible promissory notes. Download today as PDF, Word or Google Docs.
Download Template See what’s inside →Quick answer. A convertible note template is a short-term debt instrument that converts into equity at a future qualified financing round. The investor lends money to a startup, accruing interest until conversion. Key terms include the principal amount, interest rate (typically 4–8%), valuation cap, discount rate (typically 15–25%), and maturity date (typically 18–36 months). The template below covers UK convertible loan notes and US convertible promissory notes. Download as PDF, Word or Google Docs.
What is a Convertible Note?
A convertible note is a short-term debt instrument that converts into equity (shares) at a future qualified financing round. It is one of the most widely-used instruments in early-stage startup funding because it lets investors put money in quickly without negotiating a company valuation upfront — the valuation is set later, when the next priced equity round happens.
Convertible notes are sometimes called convertible loan notes in the UK or convertible promissory notes in the US. The structure is the same: the investor lends the company money (principal + interest), and the loan converts into shares on a triggering event — usually a qualified equity round.
For background reading, the UK government's SEIS guidance covers tax-advantaged convertible note investments, and the US SEC guidance on Regulation D exempt offerings covers the standard exemption convertible notes rely on for US startups.
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 × 80% = $1.60 per share
Capped Price: $5M cap ÷ shares outstanding = $1.25 per share
Conversion Price: Lower of $1.60 or $1.25 = $1.25 per share
Shares Received: $100,000 ÷ $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
What's Inside the Convertible Note Template
The template is structured the way a corporate lawyer would structure it for you, with twelve standard clauses organised into four logical groups. Each clause has placeholder text you can edit and standard fallback wording where you need a sensible default.
1. Parties & Principal
- Company (issuer) details
- Investor (holder) details
- Principal amount
- Interest rate & accrual
2. Conversion Mechanics
- Qualified financing definition
- Valuation cap
- Discount rate
- Conversion calculation method
3. Maturity & Repayment
- Maturity date
- Default valuation conversion
- Repayment terms
- Extension provisions
4. Investor Rights & Boilerplate
- Most-favoured-nation clause
- Information rights
- Pro-rata rights
- Subordination & ranking
- Governing law
All twelve clauses are editable. The cap, discount and qualified-financing threshold are the three numbers you negotiate with each investor — the rest of the document stays the same across the round.
Convertible Notes vs SAFE vs Equity Comparison
The three most common ways early-stage startups raise capital are convertible notes, SAFEs, and priced equity rounds. Each trades off speed, complexity, and investor protection differently. The chart below shows where each instrument sits across the four most important dimensions.
| 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 |
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
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
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 × (100% - discount%) | Lower price than Series A investors |
| Valuation Cap | Limit maximum conversion valuation | Cap valuation ÷ 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
Market Standard Terms (2026)
- 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
UK vs US Legal Context
Convertible notes work similarly in UK and US law but the terminology, registration and tax treatment differ. Here's the orientation.
United Kingdom (Convertible Loan Notes)
In the UK, the equivalent instrument is usually called a convertible loan note (CLN). The note must be registered in the company's books, and any allotment of shares on conversion requires board authority and a Companies House filing under the Companies Act 2006.
UK convertible loan notes can qualify for Advance Subscription Agreement (ASA)-style tax-advantaged treatment under the Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS) — but only if the conversion is structured as an irrevocable equity subscription, not a loan. Standard convertible loan notes do not qualify for SEIS/EIS relief; for that, founders should consider an Advance Subscription Agreement instead.
Under FCA Perimeter Guidance (PERG), convertible notes are typically structured to fall within the financial promotion exemptions under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 — usually the high-net-worth or sophisticated-investor exemptions.
United States
In the US, the equivalent is a convertible promissory note. These are issued under federal exemptions from registration — almost always SEC Regulation D Rule 506(b) or 506(c), which permit unregistered offerings to accredited investors.
The SEC's accredited investor rules determine who can buy unregistered convertible notes. State-level "blue sky" filings (Form D) are typically required within 15 days of the first sale.
Both jurisdictions
The substance of the instrument is the same: principal + interest + maturity + conversion mechanics. Only the surrounding regulatory framework, terminology, and tax treatment differ. The template handles both jurisdictions cleanly — just set the governing law and adjust the company-formation references.
Common Mistakes to Avoid
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
Convertible Note — Frequently Asked Questions
A convertible note is a short-term debt instrument that converts into equity (shares) at a future qualified financing round. It is widely used in early-stage startup funding because it lets investors put money in quickly without negotiating a company valuation upfront. The valuation is set later, when the next priced equity round happens.
A convertible note is a debt instrument that accrues interest and has a maturity date — it must convert or be repaid by then. A SAFE (Simple Agreement for Future Equity) is not debt — it has no interest, no maturity, and only converts on a triggering event. SAFEs are simpler and faster; convertible notes give investors stronger rights (interest accrual, repayment fallback). Most UK investors prefer convertible loan notes; most US Y Combinator-style rounds use SAFEs.
A valuation cap sets a maximum company valuation at which the convertible note converts to equity. If the company raises a priced round at a valuation higher than the cap, the noteholder still converts at the cap — getting more shares than they would at the actual price. Caps protect early investors from being diluted on big subsequent valuation jumps.
The discount rate gives the convertible noteholder a price reduction when converting. Common discount rates are 15 to 25 percent. If the qualified financing prices shares at £1.00 each and the discount is 20%, the noteholder converts at £0.80 per share. The discount compensates the noteholder for the early risk they took.
If the company has not raised a qualifying priced round by the maturity date, the convertible note typically does one of three things: (1) converts at a pre-agreed default valuation, (2) is repaid with accrued interest, or (3) is extended by mutual agreement. The template specifies which of these applies and lets you customise the maturity outcome.
A qualified financing is the priced equity round that triggers automatic conversion of the note. The threshold is set in the agreement — typically a round of at least £500,000 or $1 million in new equity. Smaller rounds may not trigger conversion to avoid the noteholder converting on a small bridge round.
The convertible note template is delivered as PDF, editable Word document and Google Docs. All three formats are included with each download.
Yes. The template is delivered in editable Word and Google Docs formats so you can customise the parties, principal, interest, cap, discount and maturity for each investor. It is common for a startup to issue multiple notes with the same terms across a single fundraising round — just change the investor name and principal for each.
Download the Convertible Note Template
This convertible note template covers every clause a founder or investor typically needs: principal, interest, valuation cap, discount rate, qualified financing trigger, maturity mechanics, MFN clause, information rights, and clean ranking and subordination terms. Suitable for UK convertible loan notes and US convertible promissory notes.
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
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
What founders say about this template
Feedback from founders and angel investors who have used the convertible note template on real fundraising rounds.
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Used this for a bridge round between our seed and Series A. Three angels signed it without legal mark-up. The MFN clause and information rights are exactly the wording I'd seen on a previous deal — saved a meaningful chunk of lawyer fees.
As an angel investor who's signed twenty of these, this is the cleanest founder-side convertible note template I've seen. The qualified-financing definition is properly drafted, not the loose wording you see in most online templates.
Decent template. The cap-vs-discount section was genuinely helpful in deciding what to offer. Wish there was a worked numerical example showing the conversion calculation, but the structure is solid.
UK-orientated convertible loan note that actually references the Companies Act 2006 properly. Most of what's online is Delaware-style. Used it for a SEIS-adjacent ASA-style structure with my accountant.
Issued five identical notes in a single bridge round to different angels. Just changed the name and principal each time. The template handles the qualified-financing trigger uniformly — all notes will convert together.
Saved me time at a critical moment in a bridge round. Closed three angel cheques in a fortnight using this as the base. My corporate lawyer signed off after about thirty minutes of review.
Related Legal Templates
Convertible notes rarely sit on their own. Here are the templates founders and investors typically pair with this one.
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SAFE Agreement
Simple Agreement for Future Equity — the equity-instrument alternative to a convertible note. Faster, simpler, no maturity. Most common in US YC-style rounds.
View SAFE template →Investment Term Sheet
The non-binding outline that often precedes a convertible note. Sets out the high-level terms before the formal note documentation.
View term sheet template →Investment Agreement
The full priced-round contract that the convertible note converts into. Used at the qualified financing event when the note converts.
View investment agreement template →Subscription Agreement
The share subscription document that triggers conversion. Signed at the qualified financing alongside the priced-round shareholder agreement.
View subscription agreement template →Shareholder Agreement
Governs the relationship between shareholders after the convertible note converts. Defines transfer rights, drag-along, tag-along and information rights.
View shareholder agreement template →Promissory Note
The non-converting cousin — a pure debt instrument with repayment only, no conversion to equity. Used for short-term bridge financing where conversion is not intended.
View promissory note template →Board Resolution
The board resolution authorising the issue of the convertible note. Required by the company's articles before the note can be validly issued.
View board resolution template →Stock Purchase Agreement
The alternative to convertible notes when the round is priced from the start. Used for direct equity purchases without conversion mechanics.
View stock purchase agreement template →