Convertible note
From Founders' Wiki
Loan that automatically converts into equity at a qualified financing event.
Parameters
- Valuation cap: Maximum valuation at which the note converts to equity (lower = better for the investor, if left out valuation is that of the priced round)
- Maturity date: Maximum duration till the qualified financing, if reached the note converts at the specified conditions
- Discount
- Interest rate
- Min. amount of qualified financing
Advantages
- Legal documents much cheaper to setup than Seed Financing documents
- Valuation determined by qualified financing (e.g. Series A)
- Quicker investment decisions
- Protects against down rounds
Disadvantages
- Debt.
- Looks bad on your balance sheet
- Potentially dangerous when going bankrupt
- Early investors have a chance that their risk is not adequately compensated (e.g. if a late Series A happens at a high valuation)
Sources
- Paul Graham: High Resolution Fundraising
- Naval Ravikant: Hack Your Funding
- Dave McClure on This Week In Startups
- Startup Company Lawyer: Convertible Notes
- Startup Lawyer: How Convertible Debt Works
- Help with valuing convertible notes (incl. how to include them in your bookkeeping)
- The Year of the Startup Default
- Manu Kumar: Thoughts on Convertible Notes
- Venture Hacks: Make your debt attractive to investors
