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How do Convertible Loan Notes work?
A convertible loan note (also known as a convertible note, or CLN) is a type of short-term debt that is converted into equity shares at a later date. Making an investment into a startup via a convertible loan note typically allows the investor to receive a discounted share price based on the company’s future valuation.
How does a convertible note convert into equity?
Investors loan money to the startup and are repaid with equity in the company rather than principal and interest. The convertible note is automatically changed into equity once a specific milestone has been reached, usually when the company is officially valued for later investments.
What is a convertible note in startup investing?
Blog > Startup Investing. A convertible note is a form of short-term debt that converts into equity, typically in conjunction with a future financing round; in effect, the investor would be loaning money to a startup and instead of a return in the form of principal plus interest, the investor would receive equity in the company.
What is a series a convertible round of debt?
Think of this as the Series A round. The convertible debt held by the investor will convert to the Qualified Securities. The amount of shares of the Qualified Securities issued to the convertible debt investor is dependent on the conversion discount per the terms of the convertible promissory note.
How much do seed investors get paid for a convertible note?
In this example that works out to $3.33 per Series A share for convertible note holders. Dividing a hypothetical $10,000 investment by that $3.33 per share price would grant the seed investor approximately 3,000 shares.
How to evaluate a convertible note?
When evaluating a convertible note, there are a few key parameters that must be kept in mind: This represents the valuation discount you receive relative to investors in the subsequent financing round, which compensates you for the additional risk you bore by investing earlier. The valuation cap is an additional reward for bearing risk earlier on.