There are many ways to raise financing for your company, but one of the most popular is a convertible note.With a convertible note, the investor loans money to the startup in return for equity in the company (rather than a payout of the principal plus interest).In this article, we’re going to cover the three most common terms you’ll come across in a convertible note: interest rate, conversion discount, and valuation cap.What is a Convertible Note?What’s the Benefit of a Convertible Note?Terms of Convertible NotesTerm 1: Interest RateTerm 2: Conversion DiscountTerm 3: Valuation CapHow Do Convertible Notes Affect Dilution?How to Be Smart with Convertible NotesBefore we can completely understand the terms in a convertible note, we need to understand what a convertible note is and how it differs from a convertible security.A convertible note is a type of convertible security. So then what’s a convertible security? Convertible securities include various instruments that expect to ultimately become stocks such as SAFE’s KISS-A’s and convertible notes. Within the world of convertible securities, convertible notes take up a space that is known as debt equity.Essentially, convertible notes act as an IOU, but instead of paying cash, you pay in equity. Here’s a more formal definition…Convertible notes also carry a unique characteristic among investments. Typically, investors can only cash out during a liquidity event, like the sale of the company, but convertible notes are technically debt, and as such, if held to maturity, a note holder could demand payback.The maturity date is a deadline for a preferred round, and only during a preferred round can a convertible note convert into equity. Let’s say there was a maturity date of 2 years from the date of investment. If the company hasn’t had a preferred round within 2 years, the investor could demand their money back. It’s…