Convertible Notes — Complex, Costly, and Mostly Unnecessary

Convertible notes were once the default way for startups to raise early-stage capital.

But today, many founders and angels still use them without fully understanding how they actually work.

In Ep#7 of Angels Decoded, Cheryl Kellond and Andy Walsh unpack why convertible notes still exist, how they function, and why both founders and investors often misunderstand the real trade-offs.

On paper, convertible notes look attractive. They include debt, interest, and a timeline for conversion into equity. That structure can make investors feel like they have something more “real” than a SAFE.

But in practice, those features rarely deliver the benefits people expect.

Debt in a pre-revenue startup rarely has real protection. Interest can create phantom income and tax headaches. And the maturity timelines almost always get extended rather than enforced.

Meanwhile, convertible notes can introduce unnecessary pressure into founder relationships and create major administrative complexity when a priced round finally happens.

This episode explores why convertible notes often solve problems that don’t really exist, while introducing new ones that founders and angels rarely anticipate.

What We Break Down

Convertible notes are technically debt
They accrue interest and convert to equity later, but that debt rarely offers real protection in early-stage startups.

Interest creates phantom income
Investors can end up paying taxes on interest that hasn’t actually produced cash.

The timeline pressure is mostly artificial
Most notes get extended rather than converted when the maturity date arrives.

QSBS tax advantages can disappear
Because convertible notes are structured as debt, investors may lose early eligibility for Qualified Small Business Stock tax benefits.

Administrative complexity explodes
Different investors entering at different times create complicated calculations when notes convert into equity.

The Big Idea

Convertible notes promise structure and security.

But in reality, they often create complexity, cost, and pressure — without providing meaningful advantages over simpler early-stage instruments like SAFEs.

Andy Walsh

2x exited founder and host of Startups Decoded (Top 2% globally). Andy helps founders sharpen judgment and build companies through practical experience and operator insight.

Cheryl Kellond

Founder of Play Money and active angel investor. Cheryl focuses on democratizing angel investing and helping new investors build diversified portfolios while supporting founders with practical guidance and community.

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Resources

Startups Decoded Podcast: https://startupsdecoded.com