Convertible Notes: 5 Common Founder Mistakes (And How to Avoid Them)

Raising early-stage capital with convertible notes? You’re not alone. They’re quick, flexible, and easy—until they’re not. If you don’t structure them right, they can quietly create chaos on your cap table and complicate future rounds.

Here’s a short and practical guide to help you dodge the five biggest mistakes founders make when using convertible notes. 

5 Common Convertible Notes Mistakes and How Founders Can Avoid Them

1. Ignoring the Impact of Multiple Convertible Notes

• The Mistake: Issuing several convertible notes at different times with different terms (caps, discounts, interest) without a clear plan. 
• Why It Hurts: It leads to cap table confusion and investor frustration. When a priced round comes, figuring out who gets what can get messy fast. 
• What to Do Instead: Keep terms consistent. Or if they must differ, model out the outcomes early and communicate clearly with all investors.  

2. Setting Unrealistic Valuation Caps 

• The Mistake: Picking an aggressive valuation cap to avoid dilution—even if it doesn’t match the market.
• Why It Hurts: You might scare off savvy investors, or worse, build a false sense of your company’s value heading into your next round. 
• What to Do Instead: Benchmark caps based on similar startups at your stage. Use data, not wishful thinking.

3. Overlooking Legal and Tax Complexity 

• The Mistake: Using templates or DIY documents without legal review.
• Why It Hurts: Convertible notes can trigger tax and accounting headaches, especially if they include tricky features like automatic conversion triggers or MFNs.
• What to Do Instead: Work with a startup attorney who understands the nuances. It’s worth every penny. 

4. Failing to Plan for Conversion 

• The Mistake: Not modeling how the note will convert in your next round. 
• Why It Hurts: Founders often get surprised by how much equity they’ve given away once discounts, interest, and caps kick in.
• What to Do Instead: Use a cap table tool (like Carta or Pulley) to visualize the dilution effects before signing.

5. Treating Convertible Notes Like Free Money

• The Mistake: Thinking of convertible notes as “easy money” because they delay pricing and negotiations.
• Why It Hurts: Thinking of convertible notes as “easy money” because they delay pricing and negotiations.
• What to Do Instead: Use notes strategically, not casually. Have a plan for conversion or repayment if needed.

Final Thoughts

Convertible notes are great—if you understand the trade-offs.

Before you sign your next note, take a moment to: 

• Model the conversion 
• Review the legal terms 
• Understand how it affects your future equity 

Need help navigating your convertible note strategy?

Reach out to our team—we’ll help you structure terms that align with your growth and keep your cap table clean.