Convertible notes are useful tools for fundraising.

They are easy to set up and often don’t require much legal work.

The best part is they don’t require a valuation to be set.

Instead, a valuation cap is used to give assurance to the investor that the valuation will not be set at an unreasonable level.

Most convertible notes convert on a subsequent round funded by equity.

In the event there’s no follow-on equity round, then the note should convert at the maturity date.

This is most often at year 3 or 5 from the start date.

One of the drawbacks of some convertible notes is that they don’t set a maturity date.

In reviewing a convertible note, make sure the note sets the maturity date and converts at that point.

This ensures the investor receives the equity stake.

For startups, this is also an important issue, in that the note left in debt form means the investor could demand their investment back with interest.

Review your convertible notes for the conversion point.

 

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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Thank you for joining your host Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.