Convertible notes are a type of debt financing that converts into equity in the future. While they can be an attractive option for startups, there are some risks associated with them from the investor’s perspective. Here are a few worth noting:
The company may not be able to raise the additional funds necessary to convert the debt into equity. This could leave the investor with a debt that can’t be repaid.
The note may convert into equity at a lower valuation than the investor was expecting. This means that the investor may end up with fewer shares than they were expecting, or that the shares may be worth less than they anticipated.
The company may not be able to reach the valuation necessary to convert the debt into equity. This could leave the investor with a debt that is worth less than the original investment.
Finally, convertible notes can be difficult to value, which can lead to a lack of liquidity. This means that the investor may not be able to sell the debt if they need too.
Overall, convertible notes can be a great option for startups, but it’s important to understand the risks associated with them before investing.
Tricia Meyer is Founder + Managing Attorney of Meyer Law, one of the fastest growing law firms in the United States! Meyer helps entrepreneurs and technology companies from startups to large corporations with day-to-day matters and notable clients include companies that have appeared on Shark Tank to companies gracing the Inc. 500 to some of the largest companies in the world. Tricia has been named on the Forbes Next 1000 list, is one of the Most Influential Female Lawyers in Chicago according to Crain’s Chicago Business and been recognized as a top 10 technology lawyer. As an entrepreneur and a lawyer, Meyer has a unique perspective and has mentored thousands of startups and scaling companies at tech incubators and accelerators across the United States such as 1871, WeWork Labs and Techstars. Tricia has been featured in Inc., Crain’s, Chicago Tribune, NBC Chicago, American Express OPEN Forum, and more. Learn more at www.MeetMeyerLaw.com and follow Meyer Law’s story on Instagram @loveyourlawyer.