Simple interest accrues on the outstanding principal at the stated annual rate from the date of the note. At conversion, the accrued interest is added to the principal and the combined amount converts into equity. At a 6% rate on a $100K note for 18 months, the converting amount is $109,000 — giving the investor more equity than their original investment would otherwise purchase.

Interest rates must comply with the applicable US state’s usury ceiling for commercial loans. A convertible note with an interest rate above the applicable ceiling may be partially or wholly unenforceable depending on state law and the severity of the usury violation. Legal Chain applies the applicable state’s usury ceiling to every generated note.

The maturity date is the date by which the note must be converted, extended, or repaid. The standard range is 18 to 24 months. For most early-stage companies, cash repayment at maturity is not a realistic option — which is why extension provisions matter. An extension option giving the company the right to extend the maturity date by 6 or 12 months with board approval, or by mutual agreement, reduces the pressure of an approaching maturity date when the qualifying financing has not yet closed.

Investors prefer shorter maturities with no automatic extension. Founders prefer longer maturities with extension options. The standard market balance is an 18 to 24-month maturity with a 6-month extension option exercisable by board resolution, and a mutual agreement extension beyond that. The note should specify what triggers automatic conversion at maturity if no qualifying financing has occurred.

The maximum company valuation at which the note converts into equity. If the priced round values the company above the cap, the note investor converts as if the valuation were the cap — receiving more shares per dollar than priced-round investors. Unlike the SAFE’s post-money cap, convertible note caps are typically pre-money — which means the cap calculation produces different dilution outcomes than a comparable SAFE cap at the same number.

When both a cap and a discount are present, the investor converts at whichever produces the lower conversion price — which always means more shares for the investor. The cap protects when the company’s valuation grows significantly. The discount protects when the priced-round valuation is near the cap. Understanding which protection applies requires knowing the expected priced-round valuation at the time the note is issued.

The percentage below the priced-round price at which the note converts. A 20 percent discount means the note investor converts at 80 cents for every dollar of priced-round share price. The discount rewards the investor for taking early risk regardless of how much the company’s valuation changes. The standard market discount for most convertible note seed rounds is 15 to 25 percent.

An MFN provision gives the note investor the right to adopt the terms of any future convertible note or SAFE issued on better economic terms before the qualifying financing closes. MFN protects early investors from the company issuing subsequent notes with lower caps or higher discounts — which would give later investors better economics for the same risk profile. MFN is more commonly negotiated in convertible notes than in SAFEs.

What happens if the company reaches the maturity date without completing a qualifying financing? Three approaches exist. Mandatory conversion into the most recent class of preferred shares at the cap. Investor’s option to convert or demand repayment. Automatic maturity extension by board resolution. The default — cash repayment — is the worst outcome for most early-stage companies and should be addressed explicitly in the note rather than left to the legal default.