When we work with our startup clients, the topic of funding comes up often. “Do we try to raise money now? How do we know how much the company is worth? We are doing great things, but the revenue is slower and lower than we would like.”
For early-stage startup funding, one early funding option is convertible notes.
Among other benefits, a convertible note allows you to postpone the valuation decision and negotiation until further down the road. The fact is, nobody really knows what a new company is worth. So if you get bogged down with potential investors discussing whether their $250,000 is worth 10% of the company, 50% of the company, or 100% of the company, nobody is right, nobody is wrong, but everybody is stuck.
Convertible notes start out their lives as loans, documented by a promissory note (a legal document that is a promise to repay a debt). The note is called “convertible” because it may later be converted into an ownership stake in the company. When and how? By a later round of investment. When the agreed-upon amount of later investment comes in, the convertible note converts into an ownership stake. The price of the shares is defined by the later investment transaction.
Next week’s post:
Why does it take so many pages of documentation and legalese to take these investment dollars? What are we, Google?