The investor’s field guide · C
Convertible note
A debt instrument that may convert into shares under conditions set out in its agreement.
Explained by the editorial team
A convertible note starts as debt and may convert into equity, often on a later funding round. It commonly has interest and a maturity date, although terms vary. Conversion may use a discount, a valuation cap or another agreed mechanism.
An illustrative situation
An investor lends money before a priced round. The note may convert when a qualifying financing occurs, using a lower price per share than the round price. A valuation cap can limit the valuation used for conversion; it is not necessarily a current valuation of the company.
What to examine
Read what happens if no qualifying round occurs before maturity, who controls conversion and whether repayment is realistically possible. Include accrued interest when modelling shares if the contract converts it too. Security, priority and investor consent rights vary. UK and US tax and legal treatment can differ, including eligibility for investment reliefs. Obtain local advice rather than assuming a standard document produces a standard result.
General information, not investment, legal or tax advice. Examples are illustrative. Read the disclaimer.