A short-term debt instrument that converts into equity at a later date, typically used by early-stage companies to raise capital without immediately issuing ownership equity. In a convertible note, the investor lends money to the company with the intention of converting the loan into equity rather than receiving cash repayment. Commonly used by seed-stage startups, the note typically includes terms such as a conversion price, discount rate, valuation cap, and provisions for qualified equity or financing transactions. For example, if an investor lends $200,000 with a 5% interest rate for two years, the total owed at the end of two years would be $220,000. Instead of repaying this amount in cash, the company may issue stock to the investor, converting the debt into ownership. Convertible notes are often used when the company is not yet ready to set a company valuation or stock price.
Read more: https://www.trica.co/equity/blog/guide-to-convertible-notes-seed-round-financing/
https://www.ipohub.org/article/valuation-caps-and-conversion-discounts