How does a convertible bond work?
Written by Eunice Chuah
Updated over a week ago

A convertible promissory note or bond is a hybrid debt instrument that is often used for angel investing. Convertible bonds typically convert into equity of the issuing company if the company reaches certain milestones, such as completing a Series A round.

Key Terms:

Conversion Discount - Grants initial investors the right to convert the amount of the loan, plus interest, at a reduced price (discount %) to the purchase price paid by the next round’s investors.

Interest Rate - Interest accrues and the total amount of interest is added to the loan amount and converted into shares of preferred stock upon the closing of the next round.

Valuation Cap - Ceiling on the valuation determining the conversion price of the bond. For example, if the cap is $5 million, and the next qualified equity round values the company at $10 million, then the bond will be converted at a $5 million valuation (effectively a 50% discount).

Term - Maturity date by which the company must trigger conversion by completing a subsequent round unless investors elect to extend the bond term, receive payment, or convert to equity.

If you have any questions about how convertible notes work, please contact us and we can explain this more in detail.

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