# Standard Convertible Note

**Type:** Debt instrument (converts to equity)
**Suitable for:** Seed rounds with established investor relationships
**Recommended when:** Investors prefer debt structure or jurisdiction requires it

---

## Key Terms Summary

| Term | Typical Range | Your Note |
|------|---------------|-----------|
| **Principal amount** | Negotiated | $[AMOUNT] |
| **Valuation cap** | $2M–$20M (seed) | $[CAP] |
| **Discount rate** | 15–25% | [DISCOUNT]% |
| **Interest rate** | 4–8% per year | [RATE]% |
| **Maturity date** | 18–24 months | [DATE] |
| **Conversion trigger** | Qualified Financing | $[MIN RAISE] |
| **Interest accrual** | Simple or compound | [TYPE] |

---

## How Convertible Notes Differ From SAFEs

| Feature | SAFE | Convertible Note |
|---------|------|-----------------|
| Debt? | No | Yes |
| Interest? | No | Yes (4–8%/yr) |
| Maturity date? | No | Yes (18–24 mo) |
| Can demand repayment? | No | Yes (at maturity) |
| Governance rights? | None | None until conversion |
| Complexity | Simple | Moderate |

**The key risk for founders:** If you don't raise a qualified financing round before maturity, the noteholder can demand repayment of principal + accrued interest. With a SAFE, there's no such cliff.

---

## Conversion Mechanics

At a **Qualified Financing** (new priced round at or above the threshold):

```
Conversion Price = MIN(
  Cap Price = Valuation Cap / Fully Diluted Shares,
  Discount Price = Series A Price × (1 − Discount Rate)
)
```

At **Maturity** (if no Qualified Financing):
- Option A: Repay principal + accrued interest in cash
- Option B: Convert at cap price (investor elects, terms permitting)
- Option C: Extend maturity (requires mutual agreement)

---

## Interest Accrual

**Simple interest** (common):
```
Accrued Interest = Principal × Rate × (Days / 365)
Total at conversion = Principal + Accrued Interest
```

**Example:** $500K note at 6% simple interest for 18 months:
- Accrued interest = $500,000 × 0.06 × 1.5 = $45,000
- Total converted = $545,000

**Why it matters:** Accrued interest also converts to equity at the discount/cap price. It increases investor's share count slightly.

---

## Protective Provisions (Common in Convertible Notes)

Unlike YC SAFEs, convertible notes often include:

- **Pro-rata rights** — investor right to participate in next round
- **Information rights** — annual financial statements
- **Prepayment restrictions** — company cannot repay early without consent
- **Change of control acceleration** — note becomes due on acquisition
- **Amendment mechanics** — majority noteholders can amend terms

**These are negotiating points.** Not all are standard. Review each carefully.

---

## What to Watch For (Red Flags)

🚩 **Maturity under 18 months** — creates pressure to raise fast
🚩 **No automatic conversion** — investor can choose not to convert
🚩 **Compound interest** — accrual accelerates against you
🚩 **Change of control repayment** — blocks acquisition before maturity
🚩 **"Super majority" amendment clause** — one investor can block amendments
🚩 **Qualified Financing threshold too high** — your seed round might not trigger conversion

---

## Template Document

```
CONVERTIBLE PROMISSORY NOTE

Principal Amount: $[AMOUNT]
Issue Date: [DATE]
Maturity Date: [DATE + 18-24 MONTHS]
Interest Rate: [RATE]% per annum (simple interest)
Valuation Cap: $[CAP]
Discount Rate: [DISCOUNT]%

FOR VALUE RECEIVED, [COMPANY NAME], a [STATE] corporation (the "Company"),
promises to pay to [INVESTOR NAME] (the "Holder") the principal sum of
$[AMOUNT], together with interest thereon from the date hereof at the rate
of [RATE]% per annum, simple interest.

1. MATURITY

Unless earlier converted pursuant to Section 2, the outstanding principal
balance of this Note, together with all accrued and unpaid interest, shall
be due and payable on [MATURITY DATE] (the "Maturity Date").

2. CONVERSION

(a) Automatic Conversion at Qualified Financing. In connection with and
contingent upon the closing of a Qualified Financing, this Note shall
automatically convert into that number of shares of the equity securities
issued in the Qualified Financing at a conversion price equal to the lesser
of: (i) the product of (A) the price per share paid by investors in the
Qualified Financing and (B) the Discount Percentage, or (ii) the quotient
of (A) the Valuation Cap divided by (B) the Fully Diluted Capitalization
immediately prior to the Qualified Financing.

"Qualified Financing" means the next sale of shares of preferred stock of
the Company in a single transaction or series of related transactions that
results in aggregate gross proceeds to the Company of at least $[THRESHOLD].

(b) Optional Conversion at Maturity. [Optional clause — varies by negotiation]

3. INTEREST
Interest shall accrue on the outstanding principal balance from the Issue
Date until the Note is paid or converted...

[FULL DOCUMENT CONTINUES — CONSULT YOUR ATTORNEY FOR THE COMPLETE VERSION]
```

---

## Before You Sign

Upload your convertible note to [Robaer.ai](https://robaeros.polsia.app/review) for an AI review that will:
- Check interest rate against current market norms
- Verify the Qualified Financing threshold doesn't block conversion
- Flag any non-standard protective provisions
- Model total dilution at different conversion scenarios
- Check maturity timeline against your fundraising runway

**This template is for educational purposes. Consult a qualified attorney before signing any investment document.**