# The convertible note

> Debt that becomes stock: interest, maturity, cap and discount — the same $250,000 as a note instead of a SAFE.

Source: https://lopifi.com/learn/ways-to-raise-startup-capital/convertible-note
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**What is a convertible note, and how is it different from a SAFE?** Debt that becomes stock: interest, maturity, cap and discount — the same $250,000 as a note instead of a SAFE.

A [convertible note](https://lopifi.com/md/glossary/convertible-note) is a loan meant to become stock. It accrues interest, has a maturity date, and converts at the next financing — principal plus interest — at the lower of its [cap](https://lopifi.com/md/glossary/valuation-cap) price or its [discount](https://lopifi.com/md/glossary/conversion-discount) price. Many notes state the cap as a pre-money valuation, divided by the shares before the round — not, like a post-money SAFE, by a capitalization that already includes the notes. This lesson models it that way.

**Scenario — The same money as a note.** Suppose Northwind had taken its $250,000 on November 2, 2026 as a note: 6% simple interest, a $5,000,000 cap and a 20% discount. At the October 1, 2027 Seed, 329 days of interest on 30/360 is $13,708.33, so $263,708.33 converts. The cap price is $5,000,000 ÷ 9,000,000 ≈ $0.555556; the discount price is $0.819798 × 80% ≈ $0.655838. The cap is lower, so the note converts into 474,674 shares — against the SAFE's 473,684, holding the Seed's price where it was.

— [ASC 470-20 — Debt with Conversion and Other Options](https://asc.fasb.org/470/tableOfContent), A convertible note is debt until it converts

**Convertible note**
- Pro: Familiar to every investor and lender
- Pro: Creditor priority if the company fails
- Pro: Cap and discount like a SAFE
- Con: Interest adds to the shares issued at conversion
- Con: A maturity date: if no round comes, the holders can demand repayment or renegotiate
- Con: Debt on the balance sheet, with conversion features that may need separate accounting
- Best for: Investors who want a creditor's position; bridges between priced rounds

**SAFE**
- Pro: No interest, no maturity
- Pro: Dilution known on signing (post-money cap)
- Con: No creditor priority for the investor
- Con: Usually a liability under ASC 480 anyway
- Best for: Most pre-seed and seed money today

## Where this page's rules come from

- [ASC 470-20 — Debt with Conversion and Other Options](https://asc.fasb.org/470/tableOfContent) — A convertible note is debt until it converts (codification)
- [ASC 815-15 — Embedded Derivatives](https://asc.fasb.org/815/tableOfContent) — When a conversion feature has to be split out of the note (codification)
- [Wikipedia, “Convertible note”](https://en.wikipedia.org/wiki/Convertible_note) — Convertible notes, from bonds to seed rounds — background (reference)

## Read further

- https://lopifi.com/md/journal-entries/accrued-interest
- https://lopifi.com/md/accounting/convertible-note
- https://lopifi.com/md/tools/daycount

- **Track:** [Cap tables & raising](https://lopifi.com/md/learn/equity)
- **Part of:** [Ways to raise: SAFEs, notes, priced rounds, debt and grants](https://lopifi.com/md/learn/ways-to-raise-startup-capital) — 6 min
- **Terms taught:** [Convertible note](https://lopifi.com/md/glossary/convertible-note), [Valuation cap](https://lopifi.com/md/glossary/valuation-cap), [Conversion discount](https://lopifi.com/md/glossary/conversion-discount)
- **Previous:** [MFN and pro rata side letters](https://lopifi.com/md/learn/ways-to-raise-startup-capital/safe/mfn-and-pro-rata-side-letters)
- **Next:** [The priced round](https://lopifi.com/md/learn/ways-to-raise-startup-capital/priced-round)
- **The course:** https://lopifi.com/md/learn