Based on my experience in corporate finance, VC, startup fundraising, and structuring convertible instruments for both early-stage and mid-market companies, the expected return on a convertible note depends heavily on the risk profile and the stage of the business.
Here is a practical, market-standard breakdown:
1. Technology Startups (High Risk / High Growth)
Investors typically expect returns primarily through equity upside, not interest.
Therefore, terms are focused on valuation advantages:
• Discount: 15–30%
• Valuation Cap: Meaningfully lower than projected next round
• Interest Rate: 4–8% (often irrelevant because conversion, not repayment, is expected)
• Maturity: 18–36 months
• Implied Return: Investors aim for 3–10× over several years, depending on success
This category compensates investors with equity leverage, not cash yield.
2. Mid-Market Firms (More Stable, Lower Risk)
These companies usually have revenue, assets, and predictable cashflow.
Convertible notes become more debt-like:
• Interest Rate: 6–12%
• Discount: 10–20%
• Valuation Cap: Sometimes optional
• Maturity: 12–24 months
• Implied Return: Typically in the range of 15–25% annually (combination of interest + discount equity gain)
Investors expect lower risk and therefore lower “equity-style” upside.
3. Traditional Small Businesses (Retail, Services, Manufacturing)
For non-tech small businesses, the convertible structure is usually used as a bridge loan, not a venture instrument.
• Interest Rate: 8–15%
• Discount: 5–15% (if equity conversion even occurs)
• Valuation Cap: Less relevant or often not used
• Maturity: 12–24 months
• Implied Return: 10–20% depending on risk and collateral
Investors here look for debt returns, not huge upside.
Summary:Type of Business & Expected Return Profile
Tech Startup
High discount + low cap → equity upside, 3–10× long-term
Mid-Market
Balanced → ~15–25% annual returns
Traditional Small Business
Debt-like → 10–20% annual cash-based returns
Convertible notes are flexible tools, but investor return expectations always follow risk, stage, and growth potential.
If you’d like, I’m happy to walk you through sample term sheets or help you model expected returns for your specific situation.
