A convertible note is a form of short-term debt that converts into equity for the holder, usually in conjunction with a future financing round. Essentially, the investor loans money to a startup, and rather than a return in the form of principal plus interest, the investor receives equity in the company.
A primary advantage of issuing a convertible note is that it does not force the issuer and investors to determine the value of the company when there really might not be much to base a valuation on –- sometimes, the company may be nothing more than an idea. A valuation will typically be determined during the Series A financing, when there are more data points off which to base a valuation.
There is much, much more information to consider in pursuing funding via convertible notes, so it is important to do your research. It is also imperative that you work with a business attorney when using or negotiating with a convertible note. Click here for a checklist to use as a starting (and finishing) point or contact one of our knowledgeable Santa Monica business lawyers here.
Dallas P. Verhagen is a business attorney and a partner at Verhagen | Bennett LLP. To learn more about Dallas, please click here.
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© 2018 Dallas P. Verhagen — This checklist is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.