

Ask HN: What are convertible notes when related to startups? - lemming

I've seen various mentions recently of convertible notes when discussing venture capital deals, but I'm not sure what that means. I've looked around a bit, and I can't find a brief description of how they're used or what they really are. It looks like in general terms they're considered more startup-friendly than traditional VC during funding but I'm not sure why this is or how such a deal would work. From reading about them, it sounds basically like an option that you can also convert into cash rather than stock. Given this, could they be used for employee remuneration in place of options under certain circumstances? What would the tradeoffs here be?
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perry227
Check this out: [http://www.inc.com/matt-quinn/the-rise-of-high-resolution-
fu...](http://www.inc.com/matt-quinn/the-rise-of-high-resolution-
fundraising.html)

From Business Insider: "Here's the deal: A convertible debt is a type of
financing that has three distinct characteristics: It doesn't give the
investor any legal authority in the company, thereby reducing legal fees
associated with the investment (from near $40k to just $5k), and it defers
valuation to the next round. In return for the risk the investors incur, they
are offered a significantly upgraded rate when investing in future rounds of
financing. A capped convertible debt essentially sets boundaries for that
significantly upgraded rate, while still avoiding negotiations on an (often
premature) evaluation of the seed or early-stage company. That cap helps avoid
the conflicts of interests that arise between a VC and a company in the
eventual valuation of a company. Meanwhile standard equity financing sets
strict parameters on the companies valuation, gives investors legal sway with
the direction of the company, and has legal fees that can reach $40k.

Read more: [http://www.businessinsider.com/whats-all-this-noise-about-
co...](http://www.businessinsider.com/whats-all-this-noise-about-convertible-
debt-2010-8?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+businessinsider+%28Business+Insider%29&utm_content=Google+Reader#ixzz143SnyPNl)

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lemming
That looks like the summary I was after, thanks!

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jeffmould
[http://startuplawyer.com/convertible-notes/how-
convertible-d...](http://startuplawyer.com/convertible-notes/how-convertible-
debt-works)

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earle
It's a form of structured debt financing.
<http://en.wikipedia.org/wiki/Convertible_bond>

It's better to have a good lawyer about this.

