The Key Clauses in a Convertible Note, Explained

What are the key clauses in a convertible note? A convertible note is a short-term loan to an early-stage startup that is designed to convert into equity rather than be repaid in cash. The investor lends money now; when the company raises a priced round, the loan plus accrued interest converts into shares, usually at a discount or subject to a valuation cap. Unlike a SAFE, a convertible note is debt: it has an interest rate and a maturity date. Its key clauses are the principal, the interest rate, the maturity date, the valuation cap, the discount, the conversion triggers, the conversion mechanics, subordination and security, repayment, and governing law. Each is explained below. This is general information, not legal or financial advice. For a real round, use a startup lawyer. ## Principal and interest The principal clause states the amount lent. The interest clause sets the rate the loan accrues, often a modest simple rate. The interest usually does not get paid in cash; instead it is added to the principal and converts into shares along with it, so the investor ends up with slightly more equity to reflect the time their money was at risk. ## Maturity date The maturity clause is the feature that most distinguishes a convertible note from a SAFE. It sets a date by which the note must either convert or be repaid if no priced round has happened. This gives the investor leverage: as maturity approaches, the company must raise, repay, or renegotiate. For founders, the maturity date is a real pressure point, so it should be long enough to give the company a fair chance to raise the next round. ## Valuation cap and discount The valuation cap sets the maximum company valuation used to price the investor's shares on conversion, so a lower cap gives the investor more shares. The discount gives the investor a percentage off the priced-round price, commonly ten to twenty-five per cent. A note may carry both; where it does, the investor typically converts at whichever produces the lower price. These two terms, as in a SAFE, carry most of the economics, and they reward the investor for coming in before the company was priced. ## Conversion triggers The conversion clause lists the events that turn the note into equity. The main trigger is a qualified financing, a priced equity round above a stated size. Other triggers usually include a change of control (the company is sold before a round, often giving the investor a choice of repayment, sometimes at a premium, or conversion) and maturity (what happens if the date arrives with no round: conversion at a set valuation, repayment, or extension). Clear triggers prevent a standoff when money is finally on the table. ## Conversion mechanics The mechanics clause sets the maths: the principal plus accrued interest divided by the conversion price, where the conversion price comes from the cap or the discount, whichever favours the investor. It should name the class of shares the note converts into and confirm the investor joins the terms of the priced round. Ambiguity here is expensive, because it surfaces exactly when a real round is closing. ## Subordination, security and repayment The subordination clause says where the note ranks against other creditors; early-stage notes are often unsecured and subordinated. The repayment clause covers the case where the note does not convert: whether it is repaid with interest at maturity, and whether the company can prepay. Because the point of a convertible note is conversion, cash repayment is the fallback, but it is a real obligation the company must be able to meet if a round does not happen. ## Governing law and the India rules The governing law clause names the law and forum, which matters because a convertible note's treatment depends on local law. In India, the Reserve Bank permits startups to issue convertible notes to investors under the foreign-exchange rules, subject to conditions: the company must be a recognised startup, the investment must meet a minimum amount in a single tranche, and the note must convert into equity (or be repaid) within a maximum period set by the rules. Foreign investment by convertible note is allowed only within those conditions, so an Indian company cannot simply adopt a foreign note template without checking that it fits. Confirm the current RBI conditions before issuing. ## A quick priority check - Is the interest rate and how it converts (added to principal) clear?

• Is the maturity date realistic, and is it clear what happens if a round does not occur by then?
• Are the valuation cap and discount acceptable, and is it clear the investor gets the lower price?
• Are the conversion triggers, including change of control and maturity, fully defined?
• For an Indian company taking foreign money, does the note meet the RBI convertible-note conditions? A convertible note is a SAFE with a maturity date and interest, and those two features shift bargaining power toward the investor. The maturity date in particular is a lever: if the next round slips, the note-holder can press for repayment, a lower conversion valuation, or better terms in exchange for an extension, so founders should treat the date as a real deadline and not an afterthought. Understand the cap, discount, maturity and triggers, and you understand the note. This is general information, not legal or financial advice; the rules vary by jurisdiction. ## Where a contract workspace helps Understanding these clauses lets you read or negotiate a convertible note with confidence. The ongoing work is harder: the maturity date, the discount and valuation cap, the conversion triggers and the interest all have to be tracked, and each note has to stay consistent with the others on the cap table. Drafting a convertible note, reviewing how its cap, discount and conversion triggers interact, and tracking the maturity date across every note you issue can sit in one AI contract workspace tuned to how your company raises money. Adira is one tool that keeps them in a single workspace. The explainer above is enough to read a convertible note on its own.