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A Note on Convertible Notes

1 min read

When launching a raise, you should always be in a position to take funding, and you are likely to meet investors who want to join the deal.

However, many investors will not be interested in taking on a lead investor role because of the work and time involved in doing so. Many investors want to take on a more passive position in the deal.

For this reason, a convertible note works well during this stage of the raise because it is a debt instrument that converts to equity later, so there is no valuation to negotiate.

Here are a few useful things to know about Convertible Notes:

  1. Startups can accept investors into the deal with relative ease, given most notes have simple terms, rights, and conditions.
  2. You can use the note over several smaller fundraises to gather investor funds.
  3. When setting up a convertible note, consider what will happen upon conversion to the cap table.
  4. Startups use convertible notes primarily for seed rounds and bridge rounds.
  5. They are lower in cost because the documents are simpler than equity terms sheets.
  6. Convertible notes avoid setting a price, so they are easier to negotiate.
  7. A convertible note keeps the cap table simple as they start in debt form and convert to equity later.
  8. The downside to convertible notes is that they have few protective provisions found in equity terms sheets, such as board seats.
  9. Valuation is not fixed, which means a later priced round will set it, and there’s little control the investor has over it.

Read more:

Hall T. Martin is the founder and CEO of the TEN Capital Network.TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email:

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