Conversion of a Convertible Note
Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.
There are three ways a Convertible Note converts to equity.
The note matures and converts to equity on the maturity date.
The startup raises a follow-on funding round in equity that counts as qualified funding.
The startup sells the business.
In each case, the note converts to equity.
If the convertible note does not have a maturity date, then it can stay in debt for the life of the note.
This may be a problem for the startup as the investor could demand their funds back.
Most convertible notes have an interest rate, so that would be an additional amount on the demand.
In signing a convertible note, check to see if all the conversion provisions are clearly laid out.
If there’s no maturity date, then ask to put one in.
These are most often at year 3 or 5.
Convertible notes make for a great way to start a fundraiser.
Make sure you know the potential outcomes for the convertible note you are signing.
Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.
Let’s go startup something today.
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