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