Convertible notes look like a clean way to raise pre-priced-round capital. A short instrument, a stated interest rate of 5 to 8 percent, a maturity in 18 to 24 months, a conversion discount of 15 to 20 percent, and maybe a valuation cap. Founders treat the interest rate as the only number that matters for usury purposes. They are wrong about that in at least four jurisdictions Florida founders routinely run into.
The reason is structural. State usury statutes do not look only at the stated interest rate. They look at the lender’s total return — fees, original issue discount, equity kickers, and (since 2021 in New York) the value of a conversion option at a discount or floating price. When a convertible note converts, the implied annualized yield can be far higher than 8 percent. In several states, that turns the note into either an unenforceable contract or a criminal instrument.
Here is the working map for a Florida founder raising across state lines in 2026.
Why convertible notes are a usury problem at all
A convertible note pays the lender in two ways. The stated interest accrues to maturity and either pays in cash or rolls into the conversion. The conversion feature — a discount to the priced-round price, sometimes capped at a valuation ceiling — transfers additional value the moment the note converts. If a $100,000 note with a 6 percent coupon converts at a 20 percent discount nine months later, the lender receives roughly $104,500 of accrued principal-plus-interest worth of equity that the cash buyer would have paid roughly $130,000 for. The implied annualized yield is in the high twenties or thirties.
Most state usury statutes define interest broadly enough to capture that excess value as “interest” for purposes of the rate cap. The question is whether the statute in the applicable jurisdiction includes the conversion premium in the calculation, and whether the corporate borrower can raise the defense at all.
New York after Adar Bays — the conversion discount is interest
The most consequential decision is Adar Bays, LLC v. GeneSYS ID, Inc., 28 N.Y.3d 215 (2021), in which the New York Court of Appeals answered two certified questions from the Second Circuit. The court held, first, that the value of a floating-price option entitling a lender to convert outstanding principal into stock at a discount must be included in the calculation of a loan’s interest rate for usury purposes. Second, the court held that a loan exceeding New York’s 25 percent criminal usury cap is void and unenforceable from inception — not merely subject to a reduced rate.
Several pieces of that holding matter for founders. New York corporate borrowers cannot raise the 16 percent civil usury cap, but they can raise the 25 percent criminal usury cap. The conversion option is valued at the time the loan is made. And the consequence is total — the note is void, the lender returns the principal it received in interest payments, and the court will not blue-pencil the rate down.
On a $50,000 convertible note with a 35 percent conversion discount, the Adar Bays court treated the value of that discount option as interest. The implied annualized rate exceeded 25 percent. The note was voided. Federal courts applying New York law have followed Adar Bays in subsequent decisions and have voided similar convertible note structures.
California — the bonus doctrine and the 10 percent civil cap
California’s civil usury rate sits at 10 percent per year. The state’s long-standing “bonus doctrine” treats anything of value the lender receives — fees, kickers, original issue discount, warrants — as interest for the calculation. A convertible note with even a modest discount easily clears 10 percent on an implied-yield basis.
The escape hatches are real but narrower than people think. California Constitution Article XV and the implementing statutes exempt loans to a corporation or LLC if specific conditions are met: the loan exceeds $300,000, or the borrower has at least $2 million in assets, and the parties have a pre-existing relationship, and the parties or their advisors can protect themselves, and the borrower is not an individual or revocable trust, and the loan is not for personal use. Most early-stage rounds satisfy some of those conditions and miss others.
California federal courts have applied state usury law to convertible notes with original issue discount where the corporate borrower exemption did not clearly apply. The practical implication is that issuing convertible debt to a California-resident investor under California-governing-law clauses, without confirming a clean exemption, is dangerous.
Florida — the criminal cap applies to corporate borrowers
Florida is unusual. The civil usury rate under Fla. Stat. § 687.03 is 18 percent per year on loans of $500,000 or less and does not reach loans to corporations in most circumstances. So far, so founder-friendly. But Fla. Stat. § 687.071 — the criminal usury statute — applies regardless of the borrower’s corporate status. Rates above 25 percent constitute a second-degree misdemeanor. Rates above 45 percent constitute a third-degree felony.
Florida courts have repeatedly held that the corporate exemption from civil usury does not extend to criminal usury. A convertible note with a steep conversion discount or a low valuation cap, issued by a Florida corporation under Florida law, can therefore implicate criminal usury even though the civil cap is unavailable. The note is unenforceable; the lender forfeits both principal and interest under Fla. Stat. § 687.071(7) when interest exceeds 45 percent.
Florida courts also include in the interest calculation any “bonus, fee, commission, or other consideration” the lender receives in connection with the loan. That formulation captures the conversion premium. The practical result is that aggressive convertible notes governed by Florida law and issued by Florida-domiciled entities should be modeled against the 25 and 45 percent criminal thresholds, not the 18 percent civil cap.
Delaware — why the venture playbook lives here
Delaware is the easiest state to draft into. Under 6 Del. C. § 2301(c), there is no limit on the rate of interest for any loan exceeding $100,000 that is not secured by a borrower’s primary residence. Under 6 Del. C. § 2306, no corporation, LLC, statutory trust, or partnership can interpose the defense of usury in any action. Between the two sections, Delaware effectively insulates any convertible note issued by a Delaware corporation or LLC from usury attack.
This is one of the reasons the venture-backed entity playbook prefers Delaware over alternative domiciles. A Delaware-incorporated, Delaware-governing-law convertible note can be structured with whatever discount and cap the parties negotiate without engineering around a usury constraint. For Florida-headquartered companies that have already incorporated in Delaware — which is the standard pattern for any company that expects priced-round venture capital — this is the simplest path.
Texas — commercial caps and the spreading doctrine
Texas presents a more layered analysis. Under Tex. Fin. Code § 302.001, the general civil cap is 10 percent, but commercial loans above $250,000 are subject to higher caps under Chapter 306, and certain commercial loans can be structured up to 28 percent. Texas applies a “spreading doctrine” that prorates interest over the entire stated term — a feature that often saves convertible notes from technical usury, because the implied yield on conversion is spread over the maturity rather than crystallized at conversion.
Texas usury also has powerful contractual cure provisions: an unintentional usurious rate can be cured by refund and downward adjustment if a savings clause is in place and the lender corrects within 60 days of notice. A well-drafted savings clause in a Texas-governed note is meaningful protection.
How to draft around the problem
Five drafting moves do most of the work on a multi-state convertible-note round.
- Pick Delaware governing law and a Delaware-incorporated issuer. This is the cleanest single move and the reason most venture-backed entities convert to a Delaware C-corp before raising convertible debt.
- Include a robust usury savings clause. The clause should cap interest at the maximum permissible rate under applicable law, require refund of any excess, and provide a unilateral lender right to reform. A savings clause matters in Texas and California; it does not save a void-ab-initio note in New York post-Adar Bays.
- Cap the conversion discount. A 15 to 20 percent discount on a 24-month maturity rarely creates a usury problem under any of the discussed regimes. A 35 percent discount on a six-month note implies an annualized yield well into criminal-usury territory in Florida and New York.
- Avoid floating-price conversion. A discount-to-VWAP or discount-to-market structure is the precise fact pattern Adar Bays attacked. Convertible notes that convert at a fixed valuation cap or a discount to a priced round are materially safer.
- Watch the interaction with original issue discount. If the lender funds $90,000 against a $100,000 face note, the $10,000 OID is interest. Combined with a conversion discount, OID can push the implied yield past every cap on the map.
Practical Takeaways
- Delaware corp + Delaware governing law is the simplest insulation from convertible-note usury risk.
- New York and California are the highest-risk regimes for floating-price or steep-discount notes.
- Florida’s criminal usury statute reaches corporate borrowers — the civil exemption does not.
- A Texas savings clause is meaningful; a New York savings clause will not save a void-ab-initio note.
- Model the implied annualized yield assuming conversion at the earliest plausible date, not at maturity.
- If you are issuing into investors who include California or New York residents, confirm the corporate-exemption analysis before signing.
Schedule a Consultation with Montague Law
If you are a Florida founder raising on convertible notes across multiple jurisdictions, or an investor evaluating an aggressive convertible structure, the difference between a 15 percent and a 35 percent conversion discount can be the difference between a normal financing and an unenforceable contract. We help Florida-based startups and investors structure convertible notes that survive the relevant usury regime, and we run the implied-yield math before papering the round.
Call Montague Law at 904-234-5653 or reach out through our contact page to schedule a consultation. With offices in Fernandina Beach and Coral Gables, we work with founders and investors across Florida and the Southeast.
For a companion piece on Florida usury law applied to seller notes and earnout kickers in M&A, see our related post: Florida Usury Law and Seller Notes — When an Earnout Kicker Turns the Deal Paper Into a Criminal Instrument. For entity-selection mechanics that drive the governing-law choice, see Florida LLC vs. Delaware C-Corp.
Frequently Asked Questions
Does usury law really apply to a startup convertible note?
Yes, in several states. Under New York law after Adar Bays v. GeneSYS ID (2021), the value of a floating-price conversion option counts as interest. California’s bonus doctrine treats any extra consideration the lender receives as interest. Florida’s criminal usury statute reaches corporate borrowers even when the civil cap does not. Delaware effectively does not apply usury to corporate borrowers.
What is a usury savings clause and does it work?
A savings clause caps the effective interest rate at the maximum permitted by applicable law and requires the lender to refund any excess. It is meaningful in Texas and California where unintentional usury can be cured. It does not save a note that the New York Court of Appeals would declare void ab initio under Adar Bays.
Can I just pick Delaware governing law to avoid usury entirely?
Yes, if the transaction has a sufficient nexus to Delaware (typically a Delaware-incorporated issuer plus a Delaware choice-of-law clause). Most venture-backed companies that incorporate in Delaware obtain this benefit by default. The choice-of-law analysis becomes harder if the issuer and investors are both outside Delaware.
What conversion discount is safe under most state regimes?
A 15 to 20 percent conversion discount on a note with an 18 to 24 month maturity rarely creates a usury problem under any of the major regimes, assuming reasonable stated interest. The risk rises sharply with steeper discounts, shorter maturities, floating-price conversion, and any original issue discount.
What happens if my Florida note crosses the criminal usury threshold?
Under Fla. Stat. § 687.071, willful interest above 25 percent is a second-degree misdemeanor and above 45 percent is a third-degree felony. Above 45 percent the lender forfeits both principal and interest. Below 45 but above 25 the lender forfeits the interest. Either outcome is catastrophic for the investor and disruptive to the company’s cap table.
Disclaimer
This post is for general informational purposes only and is not legal advice. Reading it does not create an attorney-client relationship with Montague Law or any of its attorneys. Usury analysis is intensely fact-specific; you should consult counsel about your particular convertible note structure and the governing-law selection before relying on anything written here.
