GLOSSARY
Convertible notes
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Convertible notes are a type of short-term debt that startups can use to raise funds from investors, with the debt eventually converting into equity in a future funding round.
What are Convertible Notes?
Convertible notes are a common way for startups to secure funding from investors without determining a valuation at the time of the investment. It acts as a loan that will convert into equity in the future.
Why it Matters
Convertible notes provide a quick way for startups to raise capital without the complexities of valuation negotiations. It allows founders to delay setting a valuation until a later funding round.
Examples
For example, a startup raises $100,000 through a convertible note that converts into equity during the next funding round at 20% discount to the valuation set at that time.
Related Concepts
- Equity Financing: Traditional way of raising funds by issuing shares of the company.
- SAFE (Simple Agreement for Future Equity): Another form of convertible instrument popular in startup funding.