Convertible Note

A convertible note is a loan to a startup that is designed to turn into shares later, rather than being paid back in cash. An early investor lends money, and at the next funding round the debt converts into equity, usually on terms that reward them for backing the business sooner.

It is like lending a friend money to open a cafe on the understanding it becomes part-ownership once the cafe is properly valued. A convertible note matters because it lets a company raise money quickly without having to agree its exact worth yet, while giving the early investor a fair edge for the risk.