CONVERTIBLE NOTES

Convertible notes are one of the most widely used instruments for early-stage startup financing. They allow companies to raise capital without immediately determining a fixed valuation, while providing investors with a structured path to future equity ownership.

A convertible note is structured as a loan that converts into shares in a future equity financing round, typically when the company raises a priced round such as a Seed or Series A. Instead of negotiating valuation at the earliest stage, founders and investors defer pricing until the business has developed further evidence, traction, and institutional readiness.

Convertible notes are commonly used when:

• the company is at an early stage and valuation is difficult to determine with precision
• speed of execution is required to secure capital
• the round includes multiple investors closing at different times
• founders want to avoid the complexity and cost of a full priced equity round

The instrument typically includes several core components:

• Principal – the amount invested
• Interest – accrues over time and converts into equity
• Valuation Cap – sets a maximum company valuation for conversion
• Discount – provides investors with a reduced price on future shares
• Maturity Date – defines when the note becomes repayable if not converted

When a qualified equity financing occurs, the note converts into shares of the company, usually at the more favourable of the valuation cap or discount. This ensures that early investors are rewarded for taking on higher risk.

Convertible notes offer flexibility and speed, but they introduce debt characteristics into the company’s capital structure. If not managed carefully, maturity obligations, interest accrals, and multiple overlapping notes can create pressure at later stages of fundraising.

For founders, the key consideration is understanding how each note impacts future ownership and dilution. For investors, the focus is on ensuring fair economic participation relative to risk.

The documents in this section provide a structured framework for issuing, negotiating, and executing convertible note financings in a way that aligns with standard early-stage market practice.