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What Is a Convertible Promissory Note? What Is Convertible Debt?

What are the Risks and Rewards of Investing in Convertible Promissory Notes?

What is a basic promissory note?
A promissory note is a written promise to repay borrowed money within a specified time, using periodic payments, or with one final payment, with interest at a specified rate. In the world of finance, this document is called the "note". It is often used to finance an existing business or finance a start-up business.

What is a convertible note?

A convertible promissory note is a document that offers an additional option to the holder (lender); rather than being repaid the stated principal and interest, the holder can convert part of the debt (loan) into equity (ownership) in a business venture. Convertible notes (aka convertible debt or convertible loans) are a financing mechanism whereby a company raises debt capital from investors by offering them the ability to convert all or part of the debt investment into the business's equity at a later date, at a fixed conversion ratio . The conversion terms of each business transaction will vary. Here is a typical scenario: a company raises $ 1 million in convertible debt, which has the right to convert to equity at a 25% discount to the valuation of the next financing round, or to the appraised valuation of the business.

What are the risks and benefits of investing in convertible promissory notes?

Convertible notes are the rage for start-up businesses these days. Investing in them is not a conservative investment; they are a high risk / high reward specific investment. Funds invested in convertible debt should be "surplus money", "gambling money", not retirement money or put-the-kids-through-college money. Convertible debt investing is not for the cautious, nervous or new investor.

From the investor's standpoint, they are providing loans to a new or small business at a very risky stage in a company's life cycle. The notice that they have the security…

Read More…. by Lawrence Tepper

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The post What Is a Convertible Promissory Note? What Is Convertible Debt? appeared first on Note Investing Seminars.

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