Questions

I'm learning as much as possible about the funding mechanism of convertible notes. I understand that they are a loan until they convert to equity in the future once a more reasonable valuation is established. I realize they aren't given out to just everyone, and that companies who earn a convertible note are ones the investor believes will succeed based on team, product, etc. But some will still fail before their first round of funding. What happens to the convertible note?

The practical answer is that if the company fails, the note holders will get nothing. Holding a note can be good if the company has a small exit in the future. Note holders will get first dibs on that exit cash. And in a big win, the ability to convert into shares means the note holder can still participate in those high-multiple returns.


Answered 9 years ago

Unlock Startups Unlimited

Access 20,000+ Startup Experts, 650+ masterclass videos, 1,000+ in-depth guides, and all the software tools you need to launch and grow quickly.

Already a member? Sign in

Copyright © 2024 Startups.com LLC. All rights reserved.