Convertible note
A loan that converts into equity at the next priced round, carrying interest and a maturity date unlike a SAFE.
A convertible note is debt that intends to become equity. The investor lends money today; the principal, plus accrued interest, converts into shares when a qualified financing closes, usually defined as a priced equity round above a negotiated threshold. Conversion terms mirror a SAFE’s: a valuation cap, a discount on the round price, or both, with the investor converting at whichever price is lower. The conversion math is the same; the base differs. A note’s cap is conventionally pre-money, so, unlike a post-money SAFE, it does not lock the holder’s final ownership: other instruments converting at the same round dilute the note too. The $8,000,000 cap in the worked example is a pre-money cap.
Three features separate it from a SAFE, and all three protect the investor. It accrues interest, typically 5 to 8% and most often simple, which converts with the principal rather than being paid in cash. It sits on the balance sheet as a liability until conversion. And it has a maturity date: if no qualifying round has closed by then, the loan is due, and the realistic outcomes are an extension, a negotiated conversion, or a default no early-stage board wants to test.
Notes persist where SAFEs are awkward. Some investors want the seniority of debt in a liquidation; some jurisdictions handle loan instruments more cleanly than SAFE-style contracts (France, for instance, evolved its own BSA-AIR rather than adopt the SAFE). For the founder the practical reading is simple: a note is a SAFE plus a clock plus a coupon. Price the clock honestly against the technical roadmap before preferring one to the other.
The dangerous clause for a quantum company is the maturity date. A note maturing in 18 or 24 months assumes a priced round arrives by then; a hardware milestone slipping two quarters can put the company in technical default, and every extension is negotiated from weakness. If the path to the next round is milestone-driven rather than calendar-driven, a SAFE removes exactly the clock the note imposes.
A $500,000 note carries 6% simple interest, a 24-month maturity, a 20% discount and an $8,000,000 valuation cap. A qualified financing closes at month 24: the balance is 500,000 + (500,000 × 6% × 2) = $560,000, and it converts at the lower of the discounted round price and the cap price. If no qualifying round has closed by maturity, the $560,000 is contractually due, and in practice the parties negotiate an extension, a conversion at the cap, or a repayment the company can rarely afford.
From definition to decision
Model this in your own round, scenarios, dilution and runway, in the founder workspace.