Why do startups issue convertible notes?

Convertible notes allow startups to focus on growing their business before they have to start paying back debt. This is particularly important for tech companies that need to spend a lot of time fine-tuning their product. Convertible notes are a fast and straightforward way for startups to raise money.

What triggers a convertible note?

There are typically three events that might trigger a conversion: subsequent issuance of equity (often preferred) that meets an agreed minimum threshold, sale of the company or substantially all of its assets, and maturity of the note.

Do I have to pay back a convertible note?

Convertible notes are just like any other form of debt – you’ll need to pay back the principal plus interest. In an ideal world, a startup would never pay back a convertible note in cash. However, if the maturity date hits prior to a Series A financing, investors can choose to demand their money back.

What is the difference between a convertible note and a safe?

The most significant difference is that SAFE notes prescribe a specific conversion method while convertible notes offer varying conversion terms. SAFE notes convert into the next round of preferred stock that the company issues in the subsequent priced financing round.

What is convertible debt in a startup?

What Is Convertible Debt? Convertible debt (sometimes called a convertible note) is an investment option used by early-stage investors, like venture capitalists and angel investors, to provide funds to a startup while delaying the valuation of said startup until a later date.

Are convertible senior notes good or bad?

Convertible notes are good for quickly closing a Seed round. They’re great for getting buy in from your first investors, especially when you have a tough time pricing your company. If you need the cash to get you to a Series A that will attract a solid lead investor at a fair price, a convertible note can help.

Are senior notes good or bad?

Senior notes are bonds that must be repaid before most other debts in the event that the issuer declares bankruptcy. That makes senior notes more secure than other bonds. That greater level of safety means investors earn slightly lower interest rates.

What happens if a SAFE never converts?

If the company never decides to raise again, the SAFE will continue in perpetuity without ever converting. Like most convertible equity notes, SAFEs grant investors the right to receive a certain number of shares in a future priced funding round.