One of the common terms involved in the investment business is a convertible note. It is a kind of short-term debt that is paid in terms of equity. It can be added with a future round of financing as well. If you want to start a company, you will need investors to finance your thoughts. You can follow the conventional procedure of returning the investment with a defined rate of interest. However, you can also provide equities in your business to your investors. Such equities provided to the investors in return for their investments are called convertible loan notes.
There are several terms associated with convertible notes. Some of them are:-
- Discount rate: During the financing round, you sometimes get discounts in valuation in relation to the investors. It is a form of compensation for the risk that you have taken at an earlier time.
- Valuation cap: In addition to the discount rate, you also get a valuation cap as a reward for the risk you have taken at an earlier time by investing. It marks the upper limit for the price at which it will be converted to equity.
- Interest Rate: Interest rates are often associated with these types of loans. Instead of adding the interests to the principal, it can also be considered by adding on to the number of shares that are issued to the investors.
- Maturity date: The maturity date is the date at which the company has to offer the convertible notes.
Convertible notes have several benefits for a company. Some of them are:-
- Convertible notes do not make the investors or the issuers value consider the valuation of a company. This benefit is helpful when the company has just been placed forth as an idea. The valuation will be possible when the first round of financing, thus providing more information required for the valuation process. Therefore, convertible loan notes are beneficial when you are starting a company.
- They also offer simple solutions during analysis and evaluation legally. They are cheap, and the evaluation can be executed quickly.
- As a financing option, convertible notes offer efficient intra-round or good-bridge solutions.
Therefore, convertible notes are excellent options for any company, especially when they are in their seed stage. If you also have a running company, you can provide such loan notes to your investors, and they will show more interest and dedication in your business.