Ask HN: What are convertible notes when related to startups?
I've seen various mentions recently of convertible notes when discussing venture capital deals, but I'm not sure what that means. I've looked around a bit, and I can't find a brief description of how they're used or what they really are. It looks like in general terms they're considered more startup-friendly than traditional VC during funding but I'm not sure why this is or how such a deal would work. From reading about them, it sounds basically like an option that you can also convert into cash rather than stock. Given this, could they be used for employee remuneration in place of options under certain circumstances? What would the tradeoffs here be?
3 comments
Check this out:
http://www.inc.com/matt-quinn/the-rise-of-high-resolution-fu...
From Business Insider: "Here's the deal: A convertible debt is a type of financing that has three distinct characteristics: It doesn't give the investor any legal authority in the company, thereby reducing legal fees associated with the investment (from near $40k to just $5k), and it defers valuation to the next round. In return for the risk the investors incur, they are offered a significantly upgraded rate when investing in future rounds of financing. A capped convertible debt essentially sets boundaries for that significantly upgraded rate, while still avoiding negotiations on an (often premature) evaluation of the seed or early-stage company. That cap helps avoid the conflicts of interests that arise between a VC and a company in the eventual valuation of a company. Meanwhile standard equity financing sets strict parameters on the companies valuation, gives investors legal sway with the direction of the company, and has legal fees that can reach $40k.
Read more: http://www.businessinsider.com/whats-all-this-noise-about-co...
From Business Insider: "Here's the deal: A convertible debt is a type of financing that has three distinct characteristics: It doesn't give the investor any legal authority in the company, thereby reducing legal fees associated with the investment (from near $40k to just $5k), and it defers valuation to the next round. In return for the risk the investors incur, they are offered a significantly upgraded rate when investing in future rounds of financing. A capped convertible debt essentially sets boundaries for that significantly upgraded rate, while still avoiding negotiations on an (often premature) evaluation of the seed or early-stage company. That cap helps avoid the conflicts of interests that arise between a VC and a company in the eventual valuation of a company. Meanwhile standard equity financing sets strict parameters on the companies valuation, gives investors legal sway with the direction of the company, and has legal fees that can reach $40k.
Read more: http://www.businessinsider.com/whats-all-this-noise-about-co...
That looks like the summary I was after, thanks!
It's a form of structured debt financing. http://en.wikipedia.org/wiki/Convertible_bond
It's better to have a good lawyer about this.
It's better to have a good lawyer about this.