A convertible note is an investment vehicle often used to facilitate investing in a company prior to establishing a valuation. This may be desirable for many reasons, including cost, speed, and ease of taking in money on a rolling basis.

Convertible notes are debt instruments, but most convert into equity at a later date at a conversion price determined at the time of the next equity financing round, often at a discount to the price paid by later investors or in accordance with a conversion price cap. The terms of conversion typically provide that the principal amount of the note converts automatically into equity in connection with the company’s next financing, but there may be an established “minimum size of that financing to trigger automatic conversion.