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Convertible notes are usually structured as a single agreement called the note purchasing agreement. This covers all of the financing terms. Promissory notes are then issued to individual investors with the date and amount of their investment.
Convertible notes are a loan, so there's an interest rate. The difference is that convertible notes pay interest in equity rather than cash. The interest rate is the amount that will be added to the principal amount when the note is converted.
Convertible Senior Notes For example, let's assume that a $1,000 senior note has a conversion option that allows an investor to convert their holding into 20 shares of common stock. If the market price of the common stock is $60 per share, the investor can convert the senior notes into shares worth $1,200.
Here's an example: You sell $1m in convertible notes to an investor with a valuation cap of $10m, and a 30% discount rate. After 18 months, your startup gets a pre-money valuation of $20m, at $20 per share, during a Series A funding.
Convertible Notes are loans ? so they are recorded on the Balance Sheet of a company as a liability when they are made. Depending on the debt's maturity date, they can either be shown as a current liability (loans maturing within 12 months) or as a Long-term liability (loans maturing over 12 months).