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There’s conversion rights to covert into equity, that’s why it’s called a convertible note. Otherwise it’s just called a bond.
by slashdev 3y ago
There’s conversion rights to covert into equity, that’s why it’s called a convertible note. Otherwise it’s just called a bond.
- runeks 3y agoWhat's the advantage of selling a convertible note to an investor compared to just selling them equity directly? Is the idea that if you're profitable before the note expires then you have the ability to buy the note back without losing equity?
- onlyrealcuzzo 3y agoIf you buy equity in a highly risky company, there's a very large chance that equity ends up worth nothing before you can sell it to someone else. If you do a convertible note, you have liquidation preferences and will get most of your money back in the high probability event that the company fails.
- slashdev 3y agoIt’s more complex than just that, there’s also tax implications for both investor and company. The liquidation preferences also apply in case of successful exit. If you have 2x preferences on this 1.2B note, if the company is acquired for less than 2.4B, the investor takes everything and the founder gets a gift basket, if the investor has a thoughtful secretary. If the investor has a board seat, they may even be able to force the sale over the founder’s objections. Don’t ever give your investors board seats. They are not your friends or advisors.
- ttymck 3y agoIf I understand correctly, a convertible note is much more favorable for the investor. If that is correct, is it safe to say Northvolt raised a convertible note instead of equity because their equity is not sufficiently attractive/valuable?
- slashdev 3y agoI think it’s actually beneficial to both parties, which is why it’s become the standard. It doesn’t tell you anything about the company.