What happens when a note converts?
Convertible notes give investors a right to recover their loan amount (usually with interest) or have their loan amount (and any interest) convert into shares when certain pre-agreed trigger events occur. This allows the investor to receive shares at a lower price than what they are worth.
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.
When does the interest accrue on a convertible note?
The interest accrues until the startup has their Series A valuation, at which point it is converted into shares for the investor. The maturity date on a convertible note is the “times up” date. If a startup doesn’t manage to raise a Series A, the maturity date is the day that they have to repay the investor, interest included.
What is the difference between equity and convertible notes?
The investor chooses the method that gives them the best return on their investment. While an equity investment doesn’t include interest, a convertible note is a loan and therefore does. But instead of earning interest in dollars, the holder of a convertible note earns interest in the form of more shares.
What happens to convertible notes after a series a round?
Once a valuation is set after a Series A round of funding, those original notes are converted to equity at a discounted price. For example, if the discount rate is 20\% and the Series A investors end up investing at $5 per share, then the earlier investor holding a convertible note will see their shares convert at $4 per share.