Convertible Note

A convertible note is a debt instrument that startups use to raise early-stage capital. Unlike a bank loan, the expectation is never cash repayment — the note converts into equity when the company raises a priced funding round. The investor earns equity rather than interest payments.

Key terms include: interest rate (typically 5–8% per year, accrued and added to the conversion amount), maturity date (usually 18–24 months, after which the note must convert or be repaid), valuation cap (maximum valuation at which the note converts), and discount rate (typically 15–25%, giving note holders shares cheaper than new investors).

Convertible notes are older than SAFEs and more common in traditional angel networks. They carry more legal overhead than SAFEs but are still faster than full priced rounds.

Convertible notes are widely used by Indian angel networks including Indian Angel Network (IAN) and Mumbai Angels. Under Indian company law, convertible notes are explicitly recognised for startups registered with DPIIT — companies can issue them to foreign investors without prior RBI approval up to ₹25 lakh per investor. This regulatory recognition makes convertible notes particularly useful in India's early-stage ecosystem.

Indian convertible notes typically carry 8% interest and a 20% discount, with an 18-month maturity.