What are Convertible notes in Startups?

In the previous article, I talked about the equity which the investor receives after investing some money in your company. Check my article about Equity below.

Your company is in a very early stage and when some investors invest money in your company, there should be some valuation for your company which will tell how much equity will that investor will get. and obviously, in a very early stage, this is very hard to estimate the valuation of the company, that’s where the Convertible notes come into the picture.

A convertible note is like a debt that gets paid back in Equity at a discount price with interest after some defined time. Suppose the Investor is investing some amount of money today for the convertible notes, Now when the company’s next round of funding happens, that time investor will get equity for the amount with discounted price with interest.

So during this round of funding, Investors will get Equity worth of Amount they invested + Interest on the amount at a discount price, this discount is usually around 15–20%.

Convertible notes are preferred when an early age startup doesn’t want to get involved in the big tax process and money waste without even making some profits.

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