Does a convertible note have to be paid back?

Does a convertible note have to be paid back?

Convertible notes are just like any other form of debt – you’ll need to pay back the principal plus interest. In an ideal world, a startup would never pay back a convertible note in cash. However, if the maturity date hits prior to a Series A financing, investors can choose to demand their money back.

What is the maturity date of a convertible note?

18-24 months
Convertible notes are loans and, like most loans, have a fixed maturity date at which point they are to be repaid with interest. These maturity dates vary, but typically are 18-24 months after the closing date.

What happens to convertible debt in an acquisition?

What happens to a convertible note if a company is acquired or merges with another company? Most convertible notes call for the note to be converted to common shares in the company at a pre-set price just before the acquisition/merger, often at the same price as the cap of the note.

Why do startups issue convertible notes?

Convertible notes allow startups to focus on growing their business before they have to start paying back debt. This is particularly important for tech companies that need to spend a lot of time fine-tuning their product. Convertible notes are a fast and straightforward way for startups to raise money.

What happens when a convertible note matures?

This is usually set at 18-24 months after the first convertible note investment. However, repayment of the notes upon the maturity date is usually not a great scenario for the company or the investors. First, the startup likely does not have the aggregate principal plus interest available to repay the convertible note investors.

What happens when a convertible note is converted to equity?

Any automatic conversions that occur at the maturity date (if no qualified financing have occurred) are at some price per share that is lower than the cap. Convertible notes are debt instruments that include terms like a maturity date, an interest rate, etc., but that will convert into equity if a future equity round is raised.

What are the advantages of a convertible note financing?

Convertible note financings are simpler to document from a legal perspective. This means that they are generally less expensive from a legal perspective and that the rounds can be closed more quickly. The reasons for this are simple, being that the company and the investors are putting off some of the trickier details to a later date.

What are the disadvantages of the automatic maturity date conversion?

The automatic maturity date conversion will end up costing the company a lot of money.