A convertible note is an investment vehicle often used by seed investors investing in startups who wish to delay establishing a valuation for that startup until a later round of funding or milestone. Convertible notes are structured as loans with the intention of converting to equity. The outstanding balance of the loan is automatically converted to equity at a specific milestone, often at the valuation of a later funding round. In order to compensate the angel investor for the additional risk of investing in the earlier round, convertible notes will sometimes have additional clauses, such as caps, and or discounts.

Concretely, an investor will provide an early-stage startup in need of capital with a loan, along with repayment terms. This is the “note.” The note will include a due date at which time it’s mature and the balance will be due, along with interest. Generally, however, the note is not repaid like a normal short-term loan. Instead, you repay the investor for their loan with equity in your company, usually in conjunction with another funding round.

Yes, → Loans are granted to companies and not to individuals. → The team and the project are very important criteria in the validation of a financing. forming a company formalizes ownership arrangements between co-founders. That is not an issue for the solo entrepreneur. → Forming a company is important because it creates a repository for IP rights that the founder and any employees, contractors or consultants create for the business. → When you go to investors for financing, their lawyers can quickly determine that the company they’re investing in has clear title to the IP. That’s important because doubts about who owns the IP can slow down the investment process, make it more expensive and lower the valuation.

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