Why convertible note matters to a first-time founder
A convertible note gets money in fast without agreeing a valuation, but it carries debt obligations until it converts. Interest builds up and is usually converted into shares too, so the investor ends up with more than the original amount. If no round happens by the maturity date, the investor may be able to ask for repayment. The discount and cap you accept today decide how much of the company they eventually own.
Examples of convertible note
An angel lends ¥5 million on a note with a 20% discount and 6% annual interest. A year later you raise a priced round at ¥100 a share. The note converts at ¥80, so the ¥5.3 million balance, including ¥300,000 of interest, buys 66,250 shares, where a new investor’s ¥5.3 million would buy 53,000. If no round had happened by the maturity date, you would be negotiating repayment, an extension or conversion.
Common misunderstanding
People treat the note as a SAFE, or as a casual IOU. A SAFE is not a loan and has no interest. A note is. They also think “convertible” means the percentage is a problem for your future self. The cap and the discount decide that percentage. Reading them now is the whole job.
When to use it
Use it when an investor wants the protection of debt and you are not ready to set a share price. Agree the discount, the cap, the interest, and the maturity before the money is spent.