Table of Contents
Can convertible notes be secured?
In almost all cases, your bank debt will be secured (see the Q&A above regarding security interests) and your convertible notes will be unsecured.
What happens to convertible notes at maturity?
Most convertible notes, like other forms of debt, provide that they are due at the maturity date, usually 18 to 24 months. Occasionally, convertible notes will provide that at maturity they automatically convert to equity, or convert to equity at the option of the lender.
Can a safe note be repaid?
However, since the real purpose of a SAFE note is not to be repaid but to gain equity, investors may be comfortable with this arrangement. Lower returns: Accruing no interest on a short-term investment is not a big deal. However, if you hold an investment for over a year, it could make a huge difference.
What happens when convertible notes maturity?
Can convertible notes be converted at any time?
A convertible bond is a fixed-income corporate debt security that yields interest payments, but can be converted into a predetermined number of common stock or equity shares. The conversion from the bond to stock can be done at certain times during the bond’s life and is usually at the discretion of the bondholder.
What happens to my convertible note if the company fails?
If the company fails and goes into liquidation while your note is outstanding, there may be no funds left to pay you and other convertible note investors after preceding debts, like bank loans, are repaid. You can attempt to reduce this risk through: a personal guarantee. However, most startups will not agree to this.
In this instance, investing through a convertible note is more advantageous than purchasing shares outright, as equity investors (i.e. shareholders) do not receive back the money they invested to purchase the shares. Unlike equity investors, your loan may be paid back.
Why do convertible notes accrue interest?
It effectively caps the price at which your notes will convert into equity and – in a way – provides convertible note holders with equity-like upside if the company takes off out of the gate. Since you are lending money to a company, convertible notes will more often than not accrue interest as well.
What is an example of a convertible note conversion discount?
For example, if the discount is 20\% and the new equity in the qualified financing is sold at $2.00 per share, the convertible note’s principal plus accrued interest converts at a share price of $1.60 per share. EXAMPLE: An investor purchases $25,000 of convertible notes that carry an 8\% interest rate and a 20\% conversion discount.