Startups using Convertible Notes ⁉️
I recently read an article saying “Late-stage startups tap convertible note to raise funds”. It stated that a B2B e-commerce platform named Udaan is in advanced talks to raise $150-200 million through convertible notes.
🌟What exactly are these convertible notes?
In simple terms, convertible notes are debt instruments but have a provision that allows the principal plus accrued interest to convert into an equity investment at a later date.
🌟Terms and provisions of convertible notes:
➡️ Interest: Like any other debt instrument, funds invested in convertible notes earn interest, which is not typically paid in cash but accrued.
➡️ Maturity date: These instruments carry a maturity date at which the principal plus the accrued interest is converted to equity (notes also have an option of getting converted prior to the maturity date).
➡️ Conversion discount: Apart from the conversion of debt to equity, they generally get a discount on the per share price of the new equity.
Startups are preferring this mode of financing because it is simpler to document from a legal perspective, requires no valuation to be ascribed (helpful when startups don’t achieve desired valuations)and doesn’t require regular servicing of interest on debt.
What is your opinion on Convertible Notes?
