Convertible Note - Seed Financing (Debt with Conversion Feature)
Recording the issuance of a convertible promissory note — a short-term debt instrument that converts to equity at the next priced round — including interest accrual and potential warrant coverage.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Cash & Cash Equivalents | Asset (+) | 250,000.00 | - |
| Convertible Note Payable (Short-Term Debt) | Liability (+) | - | 250,000.00 |
💡 Accountant's Note
Unlike SAFEs, convertible notes ARE debt — they have a stated interest rate (typically 5%–8% per annum), a maturity date (12–24 months), and a conversion right. If the company raises a priced round before maturity, the note converts to equity (at a discount or cap, like a SAFE). If the company does not raise before maturity, the note is due and payable in cash — creating a significant cash obligation. Because it is debt, it must be classified as a current liability if due within 12 months. Interest accrues and compounds (simple or compound per the note agreement). Convertible notes often include warrant coverage (additional equity kicker) — the warrants must be bifurcated and valued separately if they are equity-classified warrants.
Practitioner & Systems Framework
💻 ERP Architecture
Convertible notes are DEBT — they appear in the liabilities section, not equity or mezzanine. This matters enormously for balance sheet presentation (a startup with $1M in convertible notes has a real debt obligation, not just soft equity promises). Track maturity dates carefully — notes approaching maturity without a conversion trigger may need to be negotiated for extension. Extensions may constitute debt modifications requiring accounting analysis under ASC 470-50.
⚠️ Audit Flags
Auditors assess whether the convertible note requires bifurcation of the conversion feature as an embedded derivative (ASC 815). For startup convertible notes: if the conversion price is fixed (e.g., converts at $1.00/share regardless of Series A price), the conversion feature is an equity instrument (no bifurcation). If the conversion is at a variable price (e.g., 80% of the next round price, determined at conversion), the feature may require derivative bifurcation. Most startup convertible notes use standard terms that avoid derivative bifurcation.
📄 Required Documentation
Convertible note purchase agreement, board resolution, investor wire confirmation, note register (maturity dates, interest rates, conversion terms), interest accrual schedule, warrant issuance (if included), cap table impact of potential conversion.
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