Convertible Promissory Note: Finance Your Startup
By Advocate Aashish Srivastava / 2017-05-25
New business ventures often have difficulty obtaining capital (whether for starting up or for expanding operations). Today during economic downturns where standards for commercial investment are becoming watertight, a number of investors often seek non-traditional investment opportunities to enhance their portfolios. A convertible promissory note (“Note”) provides such an opportunity to serve the needs of both the startup business needing capital and the investor seeking an opportunity.

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Today, we are in the golden age of startups, where people are ready to take risks for their dreams and passion. It takes more than just a great idea to run a successful business. Entrepreneurs and existing business owners need capital to pursue their dreams.

New business ventures often have difficulty obtaining capital (whether for starting up or for expanding operations). Today during economic downturns where standards for commercial investment are becoming watertight, a number of investors often seek non-traditional investment opportunities to enhance their portfolios. A convertible promissory note ( Note ) provides such an opportunity to serve the needs of both the startup business needing capital and the investor seeking an opportunity.

Convertible Promissory Note

A short-term debt that converts into equity.  In the context of a seed financing, the debt typically automatically converts into preference or equity shares upon the event of a Qualified Financing. In other words, investors loan money to a startup as its first round of funding; and then rather than get their money back with interest, the investors receive preference or equity shares based on the terms of the Note.

Qualified Financing: Most (if not all) Notes globally contain an automatic conversion clause that dictates the automatic conversion of the convertible debt upon a “Qualified Financing.” The Qualified Financing is typically defined as an equity financing by the startup, for the purpose of raising capital, in which the aggregate of the pre-determined amount is purchased by investors. Thus, the Qualified Financing event is the trigger by which the convertible debt will automatically convert to equity. The conversion is considered “automatic” because it does not require the vote of either the startup or the investor.

New business ventures often have difficulty obtaining capital (whether for starting up or for expanding operations). Today during economic downturns where standards for commercial investment are becoming watertight, a number of investors often seek non-traditional investment opportunities to enhance their portfolios. A convertible promissory note (“Note”) provides such an opportunity to serve the needs of both the startup business needing capital and the investor seeking an opportunity.

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