How do you measure a startup's value? How do you know their idea or team has potential? It's hard for startups to answer questions like that without any form of established proof. But with convertible debt, startups do not have to answer those questions right away. Convertible debt is attractive because it allows startups to delay this issue.
What is convertible debt?
Convertible debt is an investment that "converts" into equity in the future usually at a discount to your next funding round and sometimes has a maximum price. With convertible debt, the startup issues the seed investor a promissory note, for the investment amount that contains a conversion feature. The conversion feature is the mechanism by which the debt (the promissory note) will convert into equity (new shares for the investor) upon a future event.
Convertible debt success:
With a goal of $600,00 on WeFunder, Camperoo reached 100% of its goal using convertible debt. Emmie Chang, CEO and Founder of Camperoo, set out to create a company that helps parents discover the best camps for their kids As Camperoo contunies to grow they hope to be the new marketplace for all child activities.
Emmie Chang said she used convertible debt because "documentation is relatively simple and straightforward. We could also close each investor separately in a rolling close, with some flexibility in valuation caps (which increase over time). It also reduced legal fees and time to sign."
Convertible debt is a type of security frequently used by startups when raising seed capital. Fund Wisdom can help your startup raise money through our different aggregated crowdfunding platforms. If you are an entrepreneur interesting in starting a startup using convertible debt take a look at our startup page. If you are an investor and are interested in funding startups that use convertible debt, take a look at our investor page and find the right startup for you.