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Can I get my money back from a convertible note?
In other words, convertible notes are loans to early-stage startups from investors who are expecting to be paid back when their note comes due. But, instead of being paid back in principal with interest—as would be the case with a typical loan—the investor can be repaid in equity in your company.
How long does a convertible note last?
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 is a typical term on a convertible note?
The maturity of the note—the length of time before it is due—typically ranges from 12–24 months. It is common that startups take longer to achieve their milestones then they or you expect. A shorter maturity date (12 months) is a ticking clock that might pressure an entrepreneur to raise money on unfavorable terms.
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.
What happens if convertible note expires?
If future equity rounds are not completed, the convertible note will remain debt and thus require redemption, potentially pushing still-fragile companies into bankruptcy. Certain clauses such as the valuation cap and the conversion discount can complicate future equity raises by anchoring price expectations.
How are convertible notes issued?
Simply put, a convertible note is a form of short-term debt that ultimately converts into equity. Convertible notes are typically issued in conjunction with a future financing round.
What is convertible notes offering?
A convertible note is a debt instrument that is convertible into shares of the issuer or another entity. They offer investors the downside protection of a debt instrument and the upside potential of an equity investment, but in return typically offer lower interest rates than straight debt instruments.
What is a convertible note purchase agreement?
A convertible note purchase agreement is an agreement between certain investors and a company that binds all the investors to the same terms and conditions for a particular round of convertible debt financing. Convertible debt is debt that can be converted into equity.
What is a convertible note and how does it work?
A convertible note refers to a short-term debt instrument (security) that can be converted into equity (ownership portion in a company). Convertible notes are often used by seed investors Seed Financing Seed financing (also known as seed capital, seed money, or seed funding) is the earliest stage of the capital-raising process of a startup.
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.
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.
Do you have to pay back convertible notes in cash?
In most cases, you will want to receive shares in the company. If the company is underperforming, however, the option to have your note repaid in cash may be appealing. You may be able to negotiate for your convertible note to convert into shares at a discount rate to the market value of those shares.