Are convertible banknotes the right way to fund your startup?

- Advertisement -


- Advertisement -

If the early stage a startup is ready to raise money but its valuation has not yet been established, a convertible bond could be a good fundraising option.

- Advertisement -

A convertible note is a debt instrument that is usually later converted into equity. Investors who invest in promissory notes are actually lending money to the startup, but instead of getting their investment back in dollars with interest, they get it back in the form of equity once the valuation is set in a later fundraising round.

This approach has a number of advantages for both the company and investors. Convertible bonds allow companies to defer evaluation to an equity funding round, increasing the time it takes to build a product and flesh it out. And for investors, while convertible bonds are riskier than traditional financing, they give them the opportunity to get more capital for their money than if they were waiting for a Series A.

How to determine if convertible banknotes are right for your startup

One advantage of convertible bonds that founders should not overlook is that they generally have no control or board seats.

- Advertisement -

Convertible notes are best for early stage companies, especially start-ups before they turn a profit. This could mean a company that has a solid proof of concept—a product that has been proven to work at its current scale, or a medical device in the early stages of applying for FDA approval.

In both cases, companies grow in value, and the dollars they earn through convertible bonds help them scale. The end result is that when they are ready for an equity round, they already have a higher upfront valuation than they might otherwise.

By funding a company with a convertible note, investors are looking for huge upside potential. The best-case scenario is when the company ends up with a significantly higher-than-expected valuation by the time it hits Series A.

Convertible bonds usually include a valuation cap so that early investors don’t lose out if the company’s value skyrockets to Series A. When a bond converts, investors get more capital at the price of the valuation cap, and they share the benefits of the increase in the company’s value.

Which investors use convertible notes?




Credit: techcrunch.com /

- Advertisement -

Stay on top - Get the daily news in your inbox

DMCA / Correction Notice

Recent Articles

Related Stories

Stay on top - Get the daily news in your inbox