A Convertible Note is a debt instrument (a loan) that can be converted into equity automatically upon certain conditions and/or at the option of the holder or the issuer.
Although not the main purpose of investing in Convertible Notes, they do earn interest, and 2-8% is standard. Usually, the investor will convert the principal of the note plus the interest automatically into equity when an institutional investor (such as a Venture Capitalist) makes an investment of a certain threshold amount.
Convertible Notes are generally converted into equity with a conversion discount or price cap mechanism.
Ryan RobertsStartup Lawyer
Ryan Roberts is a startup lawyer with more than two decades of experience advising on venture financings and M&A transactions totaling more than $1 billion. He is the author of the Amazon bestselling startup law book Acceleration.
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