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A convertible note is a loan that can convert into equity during a conversion event, such as a funding round. They are an option for raising money from venture capitalists and angel investors. However, the simple agreement for future equity (SAFE) has become a popular alternative.
As a founder, you could use convertible notes to raise money from investors without having to first agree on a valuation — which can make securing funding easier and faster. You can think of convertible notes as short-term loans that you repay with equity in your company.
Often, the note converts to equity once a specific milestone is reached, such as a future funding round. Investors holding convertible notes may receive a benefit, such as a discount or valuation cap (maximum price per share) compared to the current investors in the round.
If the maturity date arrives before the milestone is reached, you may have to repay or extend the note.
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