With convertible debt, a business borrows money from a lender or investor where both parties enter the agreement with the intent (from the outset) to repay all (or part) of the loan by converting it into a certain number of its preferred orcommon shares at some point in the future. The agreement specifies the repayment and conversion terms which include the timeframe and the price per share for the conversion as well as the interest rate that will be paid until either conversion or maturity.
For example, a startup raises $500,000 in convertible debt from angel investors at 6% annual interest, with a clause that the debt converts into equity shares at a 20% discount to the valuation at the next qualified financing round.
Why it matters: It allows early-stage companies to raise cash quickly without immediately setting a valuation, rewarding early investors with discounted equity later.
.avif)
.svg){kind=small}