Lock the Convertible Note Terms Before Issuing

You are about to send a convertible note to an investor. It is a short-term loan that can become equity, but if the written conditions never arrive, it is startup debt with a maturity date. When a company fails, convertible noteholders rank as unsecured creditors and can end up with little or no recovery. The note is useful when the company needs cash now and the investors are not ready to price the company yet. It becomes less useful when founders treat it as a placeholder and skip the terms that make it work.

Before the document leaves your inbox, lock the terms below. Each one should be answerable without asking counsel to interpret a paragraph. If you cannot answer it, the term is not locked. If the investor cannot answer it, the note is not ready.

• Interest rate: set the annual rate and make it match the bridge you are selling.
• Maturity date: tie the end date to a realistic path to the next round.
• Conversion triggers: define the conditions for converting into equity precisely.
• Default/recovery terms: state what happens if the company fails or cannot repay.
• Fallback path: write the plan for repayment, extension, or conversion if no qualifying round happens.

The checklist is short, but the work is in making each term specific enough that reasonable people would read it the same way.

The interest rate is the price of waiting

Notes commonly carry 4% to 8% interest. That range is small enough to feel like a formality and large enough to change the investor's math. If you set the rate too low, the investor may push back on the note. If you set it too high, you pay more for bridge capital. It is small, but it is the term the investor sees early. It should match the risk the investor is taking while the company reaches the next round.

The maturity date is the deadline you are negotiating

Maturity dates are commonly set for 1 to 3 years. The common window is 12 to 24 months, with some notes extending longer. That window matters because it sets the deadline on the company's next raise. A short date can force a raise before the product is ready. A long date can leave the investor exposed and the founder less urgent. The date should match the plan you can actually execute, not the plan in the pitch deck. If the company is close to a priced round, a shorter date may be easier to accept. If it needs a longer runway, say so in the term sheet and price the note accordingly.

Conversion triggers decide whether it becomes equity

Notes commonly convert on two triggers: a qualified priced round or an acquisition. The qualified round needs a clear definition. The acquisition trigger needs a definition of sale and a path for proceeds. If either trigger is vague, the note can stall while both sides wait for the other to move. Write the trigger as a condition, not a hope: state the minimum round size and the acquisition form that counts.

Default and fallback terms are the part founders skip

The fallback path covers the case where the company is alive but not ready to price. When a qualifying round does not occur before the note matures, founders and investors generally work out repayment, an extension, or a conversion. That path should be written down before the note is signed. A note without a clear exit can become a liability conversation. Convertible notes lack a single established form, which can make review more time consuming and expensive. Budget for counsel, and make the fallback terms part of the draft, not the revision.

This article is general information, not investment or legal advice.