Convertible Note
Also known as: Convertible Debt, Bridge Note
A debt instrument that converts to equity at a future financing round, used for early-stage investment.
Full Definition
Convertible notes are loans that convert to equity at a specified trigger event — typically a priced equity round — at a discount to the round price or a valuation cap. They allow early-stage companies to raise capital without establishing a valuation and defer equity dilution until the company has more information to support a fair valuation. Common terms include a 20% conversion discount and a valuation cap that protects early investors if the company raises at a high valuation.
Example
An early-stage digital health startup raises $500K on a convertible note with a 20% discount and a $5M valuation cap. When the company raises its Series A at a $15M valuation, the note converts to equity at the lower of the $5M cap or 80% of the Series A price — rewarding the early investor for their risk.