Now that we have considered the principal reasons a startup may choose to issue convertible notes to investors in lieu of selling shares – namely, to raise capital efficiently and without a fixed valuation – let’s get a better understanding of how a convertible note offering works. Because a startup investor’s strategy is fundamentally high-risk high-reward, convertible notes look much different than, for example, a traditional bank loan to a small business. The goal of a small business lender is to collect interest income whereas the goal of a convertible note investor is to acquire equity in a startup (at a discount) and eventually participate in a liquidity event in the form of a company sale or IPO. Therefore, the deal terms of a convertible note offering differ significantly from more traditional forms of debt financing and are more negotiable. For this reason, it is important for founders and investors to understand the typical deal terms when issuing or investing in a convertible note.[Read more…]
For the past 10 years or so, founders of early-stage startups have been increasingly turning to convertible notes and convertible equity instruments to structure investment rounds, particularly for their first capital raise. While some in the angel investment community have argued that it would be best if founders did fewer convertible note rounds and more equity deals, it’s important to consider why the convertible note structure has made such a big splash in early-stage financing world in the first place. What are the primary benefits for founders and their investors to opt for a convertible note offering over a stock offering? In future posts, we will consider the key deal terms to consider for your convertible note offering but first let’s look at the key benefits of the convertible note structure to determine if it is right for your company.[Read more…]
A convertible note is a hybrid of debt and equity, and it’s a popular form of financing for two main reasons. First, convertible notes are generally easy and cost-effective, because they require little negotiation and paperwork. Second, they allow the parties to put off valuation until a later time, which is useful, because accurately valuing a new company from the outset can be difficult.
Before you venture into a convertible note financing, it’s important to have a strong grasp of the terms of the note and how it will convert to equity.
I’ve previously written about the steps that startups and emerging companies need to take to prepare for an angel or seed round, one of which is becoming familiar with the popular investment structures that are available. With the variety of funding options out there, it’s easy to feel confused or overwhelmed when deciding how to go about raising funds. In this post, I’ll explain more about the most common investment structures, to help you develop a customized funding strategy that works for your particular business. [Read more…]