Convertible Note Explained

Описание: Another important security instrument that every founder needs to be aware of when fundraising is a convertible note. Essentially, a convertible note is a loan that carries interest that's given to the founder by the investor. And just like with every debt, the loan needs to be paid back. However, in the startup space, especially in technology, those loans are not paid back or they're converted into equity when the payment is due. And there are specific triggers that lead to such conversions. First is when a startup raises a predetermined valuation of the company, let's say upon raising $1 million at a valuation of $20 million. Second is on a specific transaction, whether the sale of the company or the IPO. And the third one is when the mutual agreement between the investor and the founder takes place.

Typically, convertible notes are a lot more complex to set up, with a lot more legal structures involved, so they tend to be thought of as more favorable towards the investor. A lot of times that's true, a lot of times it's not. But it's important for the founders to be aware of all of the moving parts when it comes to convertible notes.

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