capital-raising
A convertible note is a loan that is designed to convert into equity at a later priced round, usually with a discount and/or a valuation cap. Until conversion it is debt; after conversion it is a slice of the cap table.
A convertible note lets a company take money now without agreeing a full pre-money valuation. The holder accrues interest and, on a qualifying equity round, converts at the cheaper of a discount to the round price or a cap. If no round happens, the note may mature as debt — which is why counsel cares about IAS 32 classification and about what “automatic conversion” actually says.
SAFEs and ASA-style instruments are cousins, not twins: they may never be debt. Do not mix the templates blindly. NVCA and a long market practice still treat notes as a standard bridge tool.
Cap: the maximum effective valuation at conversion. Discount: a percentage off the next round. A low cap is expensive for founders. A high cap with a small discount is closer to a short-term loan.
€1m note, 20% discount, €8m cap, 8% interest, 18-month maturity. Next round is €12m pre-money. Conversion uses the cap (cheaper for the investor than the discount). Founders who modelled only the 20% discount understate dilution.
Bridge financing into a round that is “weeks away” (it will be months). Small angel cheques that cannot bear a priced round’s legal cost. Not as a permanent capital structure.
Stacked notes with inconsistent MFN. No cap. Maturity that hits during a down round with no conversion path. Treating a note as “not dilution” because it is not yet shares.
Notes defer the argument; they do not delete it. Later venture capital leads will reset terms anyway.
Model conversion before you sign. A cap table object that can toggle “as-converted” is part of raising like an adult, even at seed.