Convertible Notes: The 5 Clauses That Determine How Much of Your Startup You're Selling

TL;DR

• The “mútuo conversível” (convertible note) is a loan (Brazilian Civil Code, arts. 586 et seq.) that the investor may convert into equity. Until conversion, it is debt — and debt matures.
• The valuation cap and discount define the conversion price; interest and monetary adjustment increase the converted amount and, therefore, the dilution.
• A matured note with no renegotiation and conflicting conversion formulas across instruments are among the findings that most often stall Series A due diligence.
• The “contrato de participação” (participation agreement) under Complementary Law 155/2016 is an alternative for angel investors in companies under the “Simples Nacional” tax regime (simplified tax regime for small businesses) — with different logic and limits.
• A foreign investor using a convertible note structure must register with the Brazilian Central Bank (Banco Central do Brasil, or BCB) before conversion, not after.

Updated on 06/11/2026. The tax treatment of angel investors and the limits under Complementary Law 155/2016 may change with the regulation of the tax reform (Constitutional Amendment 132/2023 and Complementary Law 214/2025). Check the date on this page before making any decisions.

Why the convertible note became the Brazilian seed-stage standard — and what that standard hides

The convertible note (“mútuo conversível”) came to dominate Brazilian seed-stage deals because it solves a problem for the investor, not the founder: whoever lends the money doesn’t immediately become a shareholder, and therefore doesn’t take on the labor and tax risks that historically fell on quotaholders (“quotistas”) of a “sociedade limitada” (Ltda., Brazil’s most common private company structure, broadly similar to an LLC). The investor enters as a creditor (loan agreement — “mútuo”: Civil Code, arts. 586 to 592) and only converts into equity once the company has proven it’s worth it — usually at the next round.

What that standard hides: because it’s “the market-standard structure,” many founders sign the draft sent by the investor without negotiating the economic variables. But there is no such thing as a standard convertible note — there’s a standard contractual skeleton filled in with numbers that vary case by case. Two contracts identical in form can mean 8% or 20% dilution at conversion, depending on five clauses.

The 5 clauses that decide your dilution

1. Valuation cap. The maximum valuation used for conversion. If the Series A closes at BRL 40 million and the cap is BRL 10 million, the investor converts as if the company were worth BRL 10 million — receiving 4x more equity per real invested than the round’s investors. A low cap is the quietest way to sell more of your company than you realize.
2. Discount. The percentage discount applied to the price of the conversion round (typically 15% to 30%). Pay attention to the wording: in most contracts, the cap or the discount applies — whichever is more favorable to the investor — not both stacked together. If the draft allows them to be combined, the dilution shifts to a different level.
3. Interest and monetary adjustment (“correção monetária”). The amount that converts is not the amount invested, but the amount invested plus interest and monetary adjustment (indexed to the IPCA inflation index, the CDI benchmark rate, or a fixed rate) accrued until conversion. In a note that takes 3 years to convert, interest at CDI + 4% per year meaningfully increases the conversion base — and every extra real in that base means extra dilution.
4. Maturity and repayment scenarios. A “mútuo” is debt with a due date. If it matures before a funding round, the investor may, depending on the contract, demand repayment — with interest — from a company that probably doesn’t have the cash. Negotiate a term that matches your fundraising cycle, along with clear rules for extension or automatic conversion at maturity.
5. Conversion triggers and investor rights. The contract defines when conversion is mandatory, optional, and at whose discretion; what counts as a “qualified round”; and what rights the creditor already exercises before converting — veto rights over material matters, information rights, anti-dilution protection, tag-along rights, preferential rights in future rounds. Broad veto rights in a creditor’s hands can block company decisions for years.

Conversion itself also has a formal procedure: for a “Ltda.”, it requires amending the articles of association (“contrato social”) to admit the new member; for an “S.A.” (corporation), it requires a capital increase with the subscription of shares (Corporations Law — Law 6,404/1976, arts. 166 and 170). Spelling out this mechanic in the contract reduces friction when it’s time to execute.

Convertible note vs. participation agreement (Complementary Law 155/2016) vs. direct equity

Complementary Law 182/2021 (the Legal Framework for Startups — “Marco Legal das Startups”) reinforced protections for investors who don’t take an equity stake. In practice, the participation agreement under CL 155/2016 tends to appear in smaller investments in companies under the “Simples Nacional” regime; the convertible note remains the general-purpose instrument; and direct equity is reserved for priced rounds, when it’s worth the cost of negotiating a full valuation and shareholders’ agreement.

Red flags that stall Series A due diligence

Whoever audits your cap table at Series A will be looking for exactly this:

1. A matured, unaddressed note. Enforceable debt sitting on the balance sheet, with no signed renegotiation, becomes a closing condition precedent — and hands the creditor leverage at the worst possible moment.
2. Conflicting conversion formulas. Three angel investors, three different drafts, three different definitions of “qualified round” and conversion base. Reconciling this under closing pressure costs time and concessions.
3. Cap and discount stacked due to ambiguous wording. The investor will read any ambiguity in their own favor.
4. Unmodeled total dilution. Founders who never added up the conversion of all instruments discover at the round that they’ll be giving up more than planned — and the new investor recalculates everything in their offer.
5. Disproportionate veto rights. A creditor’s veto over operational matters spooks funds, who will demand its removal as a condition of investing.
6. Foreign investment without Central Bank registration. Without registration, both conversion and future outbound remittances are compromised.

Editorial case study (details altered to preserve confidentiality). A B2B software startup with roughly 30 employees was negotiating its Series A. The company had three convertible notes signed in different years, with diverging conversion formulas, one of which had matured eight months earlier. The engagement focused on renegotiating the matured instrument, reconciling the conversion bases across the three contracts, and coordinating simultaneous conversion as a closing condition. Due diligence proceeded without material qualifications regarding the cap table.

Foreign investors on the cap table via convertible notes (registration, foreign exchange, conversion)

Foreign capital in Brazil is governed by Law 4,131/1962 and Law 14,286/2021 (the new foreign exchange framework), with declaratory registration with the Brazilian Central Bank (Banco Central do Brasil, or BCB). For convertible notes, sequencing matters:

1. When the funds come in: a loan granted by a non-resident is treated as foreign credit and must be registered in the BCB’s Foreign Capital system (SCE-Crédito) before or upon the inflow of funds, together with the corresponding foreign exchange contract.
2. During the term: interest remitted abroad is subject to withholding income tax (IRRF) and may also trigger the Tax on Financial Transactions (IOF), depending on the term and structure of the transaction — how the contract is drafted affects the tax cost.
3. At conversion: the registered credit is converted into foreign direct investment, migrating from the credit registration to the investment registration (SCE-IED), through a symbolic foreign exchange transaction, with no new inflow of funds.

The recurring mistake is bringing money in without proper registration and trying to sort it out years later, right before the round. Regularization is possible in many scenarios, but it eats into closing time and can generate costs that timely registration would have avoided.

Before you sign: a founder’s checklist

1. Model dilution under three round scenarios (pessimistic, base, optimistic), adding up all convertible instruments already signed.
2. Confirm whether the cap and discount are alternative (“whichever is more favorable”) or cumulative — and whether this is stated without ambiguity.
3. Calculate the conversion base at maturity: principal + interest + monetary adjustment. That’s the number that dilutes you, not the amount originally invested.
4. Check what happens at maturity if no round has closed: collection, automatic extension, or conversion at the cap?
5. List the investor’s pre-conversion rights (vetoes, information rights, preferential rights) and assess whether they’re compatible with day-to-day operations.
6. Define the conversion mechanics (Ltda. or S.A.) and who’s responsible for the corporate formalities.
7. If the investor is foreign, handle Central Bank registration before the funds come in.
8. Standardize the draft: the second and third angel investors should sign instruments compatible with the first.

Frequently asked questions

Convertible note or SAFE: which should I use in Brazil?

In Brazil, the convertible note (“mútuo conversível”) is the instrument with the most settled legal framework; the SAFE (Simple Agreement for Future Equity, the U.S.-standard instrument) needs adaptation to produce equivalent effects here. The original SAFE is neither debt nor equity — a category that has no direct counterpart under Brazilian law, which raises questions about its accounting and tax treatment. For that reason, “Brazilian SAFEs” tend, in practice, to be interest-free convertible notes or atypical contracts inspired by the U.S. model. For local angel and seed deals, a convertible note or a participation agreement under Complementary Law 155/2016 tend to generate fewer issues in future due diligence. An adapted SAFE shows up more often when the investor is foreign and requires a familiar format — and in that case, adapting it to Brazilian law and handling foreign exchange registration deserve extra attention.

Does the convertible note investor become a shareholder? When?

No — as long as the note hasn’t converted, the investor is a creditor, not a shareholder. They only become a shareholder when a conversion event set out in the contract occurs (typically a qualified round, the sale of the company, or maturity, if so agreed) and the corporate formalities are carried out: amending the articles of association for a “Ltda.”, or a capital increase with subscription of shares for an “S.A.” (Corporations Law — Law 6,404/1976, arts. 166 and 170). This is precisely why the instrument became standard: the investor defers shareholder status — and the risks that come with it — until the company proves itself. For the founder, the practical consequence is that the rights the creditor exercises before converting (veto, information, preferential rights) come from the contract, not from corporate law; anything not written down doesn’t exist. That’s why negotiating the draft matters just as much as the size of the check.

What happens if the note matures before the startup raises a new round?

It depends entirely on what the contract says — and this is one of the most overlooked points at signing. There are three typical outcomes: (1) the investor may demand repayment of principal plus interest and monetary adjustment, as with any matured loan; (2) the contract provides for automatic extension or extension by mutual agreement; (3) the contract provides for conversion at maturity, usually at the valuation cap. Scenario 1 is the most dangerous for the company: a pre-Series A startup rarely has the cash to pay off the note, and the matured debt shows up as an outstanding issue in the next round’s due diligence, giving the creditor renegotiating leverage at the moment of greatest pressure. Before signing, negotiate a term that matches your fundraising cycle and a maturity outcome that doesn’t depend on cash on hand. If the note has already matured, formalize the renegotiation in writing — verbal agreements don’t hold up in due diligence.

How should a company prepare to receive investment?

Get four fronts in order before the term sheet arrives: corporate structure and contracts (updated articles of association, founder vesting formalized, IP assigned to the company), contingencies (tax, labor, and civil liabilities mapped and addressed), governance and reporting (organized financial statements, a consolidated cap table simulating the conversion of all instruments), and the round’s own instruments (term sheet, convertible note or participation agreement, shareholders’ agreement). Complementary Law 182/2021 (the Legal Framework for Startups) and Law 6,404/1976, art. 118, provide the framework for agreements between shareholders and investors. Clean due diligence speeds up negotiations and leaves less room for the investor to recalculate terms during closing. If there are prior convertible notes, reconciling them before the round — not during it — is usually the preparation step that most reduces friction at closing.