Fri, 16 April 2021
Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.
The Convertible Note is a commonly used investment structure for funding startups. It’s a short-term debt instrument that converts into equity later. If the issuer wants a debt instrument without conversion to equity, a promissory note would be a better option.
A Convertible Note has three components which are the interest rate, discount rate, and cap rate:
The conversion from debt to equity is usually based on a future financing round. If there is no follow-on financing round, then the note often sets a time limit (say 3 to 5 years), at which point it will convert at the cap rate.
The Convertible Note works well for investors who want to invest relatively small amounts. Investors seeking to make large investments typically want a valuation set, board seats determined, and control provisions set which often requires an equity term sheet.
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