Raising early capital is challenging when your startup has little revenue and no clear valuation. Many Canadian startups use convertible notes to get funding now and set the company’s value later, after gaining more traction. Some government-backed programs, such as the Innovative Solutions Canada (ISC) Testing Stream, use repayable or convertible structures to support early-stage tech companies.
A convertible note is a repayable investment that starts as debt. Later, it can turn into equity if certain conditions are met. In Canada, startups often use convertible notes for pre-seed or seed capital from angel investors, accelerators, and some public programs.
Here is how a typical convertible note works:
You get cash upfront
An investor provides funding, usually between $25,000 and $500,000 in early rounds. For example, the ISC Testing Stream offers eligible startups up to $150,000 for testing their innovations.
Interest adds up over time
Interest rates are usually modest—often 4% to 8% per year in private deals. Instead of paying the interest in cash, it usually adds to the amount that converts into equity later.
Conversion happens at a trigger event
Most notes convert during a future priced equity round, like Seed or Series A. The investor receives shares instead of repayment.
A valuation cap or discount applies
Investors are rewarded for taking early risk. A valuation cap sets the highest company value used for conversion, or a discount (often 10%–25%) is applied to the future share price.
If no conversion happens, repayment may be required
Convertible notes are legally debt. If your startup never raises a qualifying round, you may need to repay the note unless you and the investor agree to new terms.
Programs like the ISC Testing Stream make it clear that this funding is repayable and not a non-repayable grant. This is important for founders planning their cash flow.
The Innovative Solutions Canada (ISC) Testing Stream is a federal program that helps Canadian startups test and commercialize new technology. It uses a repayable or convertible structure to support early-stage companies.
Key details:
This structure lets startups move quickly without giving up equity right away. At the same time, it protects the public funder if things don’t go as planned.
GrantHub tracks hundreds of active grant and repayable funding programs across Canada. You can find programs like ISC and others that use convertible or repayable structures.
Convertible notes are popular in Canada for several reasons:
Faster to close than priced equity
You avoid long debates about valuation when your company is still new.
Founder-friendly in early stages
You keep more ownership at the start, compared to selling equity right away.
Compatible with public funding
Some government programs, accelerators, and innovation hubs use repayable or convertible structures.
Signals venture intent
Programs like the ISC Testing Stream are designed for companies aiming for fast growth.
Remember, convertible notes are not free money. Treat them as a real financial commitment.
Assuming a convertible note is a grant
Programs like ISC are clear: this funding must be repaid or will convert into equity. Confusing this can hurt your future fundraising plans.
Ignoring the maturity date
If your note matures before you raise another round, you could face pressure to repay at a difficult time.
Stacking too many notes
Having several notes with different terms can confuse or scare off future investors.
Not planning your next raise
Convertible notes work best when you have a realistic plan to raise a priced round within 12 to 24 months.
Q: Are convertible notes common for Canadian startups?
Yes. Many pre-seed and seed stage tech startups use them, especially if they expect to raise venture capital later.
Q: Is a convertible note debt or equity?
It starts as debt and is designed to convert into equity during a future financing event. Until then, it is legally repayable.
Q: Does ISC require repayment?
Yes. ISC Testing Stream funding is structured as a repayable contribution, not a non-repayable grant.
Q: Can convertible notes replace grants?
No. Grants are non-repayable. Convertible notes are a form of early-stage financing, sometimes offered through public programs.
Q: What happens if my startup never raises another round?
You may need to repay the note or renegotiate with the funder, depending on your agreement.
GrantHub is a resource for discovering Canadian funding programs, including those that use convertible notes and those that offer grants.
Convertible notes can help bridge the gap between bootstrapping and raising venture capital. If you’re considering programs like the ISC Testing Stream or other repayable funding, knowing how these tools work will help you avoid surprises. GrantHub can help you find Canadian programs that fit your business stage, location, and growth goals.
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