If an early stage If a start-up is ready to raise money but its valuation is yet to be determined, a convertible bond can be a good fundraising option.
A convertible bond is a debt instrument that is usually converted into equity at a later date. Investors who invest in a note are effectively lending money to the startup, but instead of getting their investment back in dollars with interest, they get it back in the form of equity once a rating is assigned in a later round of fundraising.
This approach has a number of benefits for both the company and the investors. Convertible bonds allow companies to delay valuation until an equity funding round, which increases the time they have to develop and flesh out a product. And for investors, while riskier than traditional financing, convertible bonds offer them the opportunity to get more equity for their money than if they waited until Series A.
This is how you can tell if convertible bonds are a good fit for your startup
One benefit of convertibles that founders shouldn’t overlook is that they typically don’t have controlling or board seats.
Convertible bonds are best for early-stage companies, especially pre-sales startups. That could mean a company that has a solid proof of concept – a product proven to work at current scale, or a medical device in the early stages of applying for FDA approval.
In both cases, the companies are building their value, and the dollars they raise with a convertible help them scale. The bottom line is that by the time they’re ready for an equity funding round, they already have a higher pre-money rating than they otherwise would.
When financing a company with a convertible bond, investors are looking for massive upside. The best-case scenario is when the company has a significantly higher valuation than expected by the time it reaches Series A.
Convertible bonds typically include a valuation cap so early investors don’t lose out if the company’s value skyrockets ahead of a Series A. When the debenture is converted, investors receive more equity at the valuation cap price and share the benefits of the company’s appreciation.
What type of investors use convertible bonds?
https://techcrunch.com/2022/07/15/are-convertible-notes-the-right-way-to-fund-your-startup/ Are convertible notes the right way to fund your startup? – TechCrunch