Using Convertible Notes Wisely

Using Convertible Notes Wisely

October 5, 2020 by investor

Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.

In launching your fundraise, you should always be in a position to take funding. There are many investors who want to join the deal but won’t take on a lead investor role in setting the terms.

A convertible note works well for this stage of the raise. It’s a debt instrument that converts to equity later, so there’s no valuation to negotiate.

Startups can accept investors into the deal with relative ease, given most notes have simple terms, rights, and conditions.

The note is on a rolling close. So the investor signs the check, the startup signs the note, and the funding goes into the business the next day.

One can use the note over several smaller fundraises to gather investor funds.

When setting up a convertible note, consider what will happen upon conversion to the cap table.

Startups should take care not to raise too much funding off convertible notes. 

In later stages, such as raising a Series A, investors are going to want a certain amount of ownership in the deal. If there is too much convertible debt, then it will be difficult to give the investor the ownership they want.

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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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.