Convertible Note

A financing instrument developed by Y Combinator that provides investors with the right to receive equity at a future priced round, subject to a valuation cap and/or discount. SAFEs are simpler than convertible notes, carry no interest, and have no maturity date.

Short-term funding used to bridge the gap between two financing rounds or before an anticipated liquidity event. Bridge loans or convertible notes are common structures, often provided by existing investors to sustain operations until the next milestone.

A short-term financing facility designed to provide temporary capital to a company or fund until permanent financing or the next funding round is secured. In the startup context, bridge loans often carry convertible terms that allow the lender to convert the outstanding balance into equity at a discount to the next round's price, compensating for the higher risk of interim financing.

A high-net-worth individual who provides early-stage capital to startups in exchange for equity or convertible debt. Angel investors typically invest their own money and often contribute mentorship and industry connections alongside funding.

A financing round in which a company raises capital at a lower valuation than its previous round. Down rounds signal reduced confidence in the company's prospects and typically trigger anti-dilution protections that further dilute founders and earlier investors.

The valuation of a company immediately before a new funding round. Pre-money valuation is negotiated between the company and investors and, combined with the amount raised, determines how much equity is issued to new shareholders.

A hybrid form of capital that combines elements of debt and equity, typically structured as subordinated debt with equity warrants or conversion features. Mezzanine financing is often used in leveraged buyouts, growth capital, and recapitalisations, and sits between senior debt and equity in the capital structure.

The return that could have been earned by investing in the next best alternative of comparable risk. Opportunity cost of capital is the foundation for discount rates used in intangible asset valuations and investment decisions, ensuring that capital is allocated to its most productive use.

What is a SAFE and how does it work?

A SAFE (Simple Agreement for Future Equity) is a short, investor-friendly contract where an investor gives money now in exchange for equity at a future financing event — it is not debt and has no interest or maturity date.

What is bridge financing and when do companies use it?

Bridge financing is short-term debt or convertible instruments used to fund operations between major equity rounds, typically converting to equity at the next round's valuation.

What is the difference between a SAFE and a convertible note?

SAFEs are simpler, cheaper, and have no maturity date or interest — they convert only at a future financing event. Convertible notes are debt with interest and a maturity date, creating pressure to convert or repay.