TLDR:
A promissory note is a written financial instrument that constitutes a promise by the maker to pay a specified sum of money to a named party at a definite time or on demand.
Promissory Note vs. Convertible Note
While both promissory notes and convertible notes are debt instruments, they serve fundamentally different purposes in startup financing. A plain promissory note is pure debt: it obligates the company to repay principal and interest on a specified schedule with no equity conversion feature. A convertible note is structured debt that is expected to convert to equity at a triggering event. In practice, pure promissory notes in startups are most common for intra-company loans, founder loans, and short-term bridge financing from existing shareholders who want simple documentation without equity complexity.
Promissory Notes vs. Convertible Notes
A promissory note is a written promise to pay a specific sum on demand or at a specified date. A convertible note is a specific type of promissory note that can convert to equity under defined circumstances. Pure promissory notes are debt only — interest accrues, principal is repaid on maturity, and no equity conversion is contemplated. They are most common in friends-and-family lending, founder loans, and short-term bridge financing where equity conversion is not intended.
Key Terms
A well-drafted promissory note specifies: principal amount, interest rate (and whether interest is paid periodically or accrues to maturity), maturity date, payment schedule, prepayment rights, default events, collateral or security (if any), and governing law. Notes can be secured (backed by specific collateral with a security agreement and UCC filing in the US, or similar perfection mechanisms in other jurisdictions) or unsecured. The distinction matters enormously in default and bankruptcy scenarios.