Do Convertible Notes Dilute?

Are convertible notes bad?

You may have heard that it’s cheaper, faster and easier to do a convertible note, but the fact is that convertible notes are going to end up costing the company approximately 25% MORE than an equity deal.

The reason for this is that when the note converts, then it converts into EQUITY..

Do convertible notes dilute?

The stocks that convertible bondholders get when they convert their bonds come in the form of newly issued securities, which can harm previous investors. In the absence of protections, convertible bonds almost always dilute the ownership percentage of current shareholders.

Do you have to pay back a convertible note?

A convertible note is debt. The details differ, but usually when someone writes you a convertible note for $100,000, you’re expected to pay it back, along with some interest, in 1-2 years.

What is a discount on a convertible note?

Effectively this permits an investor to convert the principal amount of their loan (plus any accrued interest) into shares of stock at a discount to the purchase price paid by investors in that round. Discounts range from 0% to as high as 35% with 20% being common.

What happens when a convertible note matures?

Maturity Date: Convertible notes carry a maturity date, at which the notes are due and payable to the investors if they have not already converted to equity. … The most common method of conversion occurs when a subsequent equity investment exceeds a certain threshold. This is called a qualified financing.

What is a safe convertible note?

SAFE notes are a form of a convertible security. They are used as a legally binding promise that, at a later date, an investor will be given the opportunity to buy shares at an agreed price. … As such, they are a relatively new option for investors and startup founders.

Why do companies offer convertible senior notes?

Companies issue convertible bonds or debentures for two main reasons. The first is to lower the coupon rate on debt. … Raising capital through issuing convertible bonds rather than equity allows the issuer to delay dilution to its equity holders.

Are convertible notes debt or equity?

What is a Convertible Note? A convertible note is short-term debt that converts into equity. In the context of a seed financing, the debt typically automatically converts into shares of preferred stock upon the closing of a Series A round of financing.

How do convertible note caps work?

A convertible note cap sets the maximum valuation at which the investment made via the convertible note can convert into equity. Investors in the convertible note typically get converted at the lesser of the valuation of the next qualified priced round and the cap.