Product details

By continuing to use our site you consent to the use of cookies as described in our privacy policy unless you have disabled them.
You can change your cookie settings at any time but parts of our site will not function correctly without them.
Technical note
-
Reference no. UVA-F-1925
Published by: Darden Business Publishing
Originally published in: 2019
Version: 13 December 2019
Revision date: 07-Jan-2020

Abstract

Convertible notes are often used to raise early-stage financing for start-up companies, frequently due to their advantages related to delayed valuation, greater speed, and lower cost of completion compared to venture capital financing. As a result, there has been a large increase in the number of early-stage companies raising capital through convertible notes over the past decade. Investors have made this form of financing more available, believing that small amounts of money can significantly advance the development of young companies. Entrepreneurs often find that convertible notes are easier to raise than a first round of venture capital. The ease of convertible note financing, however, sometimes belies the hidden risks and costs associated with its use. This technical note discusses the most frequently used terms and arrangements of early-stage convertible notes, the estimation of the noteholder's equity ownership from delayed valuation, and the costs and risks of this form of financing to both entrepreneurs and investors.

About

Abstract

Convertible notes are often used to raise early-stage financing for start-up companies, frequently due to their advantages related to delayed valuation, greater speed, and lower cost of completion compared to venture capital financing. As a result, there has been a large increase in the number of early-stage companies raising capital through convertible notes over the past decade. Investors have made this form of financing more available, believing that small amounts of money can significantly advance the development of young companies. Entrepreneurs often find that convertible notes are easier to raise than a first round of venture capital. The ease of convertible note financing, however, sometimes belies the hidden risks and costs associated with its use. This technical note discusses the most frequently used terms and arrangements of early-stage convertible notes, the estimation of the noteholder's equity ownership from delayed valuation, and the costs and risks of this form of financing to both entrepreneurs and investors.

Related