What are Convertibles?
In the context of startups, a convertible refers to a type of security that can be converted into another type of security, typically equity shares, at a later point in time.
Convertible securities are often used in early-stage startup financing as a way for investors to provide capital to the company without having to determine the company’s valuation upfront.
This allows both the investors and the company to defer the valuation discussion until a later time when more information about the company’s performance and prospects is available.
Convertible securities typically come in the form of convertible notes or convertible debt, which are debt instruments that can be converted into equity at a later date. The terms of the conversion, such as the conversion price and conversion ratio, are usually determined at the time of the investment.
Overall, convertible securities are a popular financing option for startups because they provide flexibility and can help bridge the gap between seed funding and later-stage financing rounds.