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Convertible notes are issued as loans to early-stage companies, and they are designed to convert into equity at a subsequent funding round. The initial loan is normally designed with a maturity date, and interest is normally paid by the company.
Convertible Note Meaning: A Hybrid of Debt and Equity. What is a convertible note? In short, a convertible note is originally structured as a debt investment but has a provision that allows the principal plus accrued interest to convert into an equity investment at a later date.
Convertible Note Meaning: A Hybrid of Debt and Equity. What is a convertible note? In short, a convertible note is originally structured as a debt investment but has a provision that allows the principal plus accrued interest to convert into an equity investment at a later date.
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.
The basic concept for valuing a convertible note is the same in theory as the valuation of any other financial asset. The value of the note is equal to the present value of the future income that the convertible note will receive, discounted to the present value based on its associated risk.