Convertible Debt
Convertible Debt is a short term debt that is owned by the company, which can be converted into share values at any desired time. The debt includes the loans and funding it had received from its investors. The company does not have to pay any premiums for these debts. Also these debts are not time bound, thus the startups are free to operate at the initial stages.
How a convertible debt work?
During the initial stages of their start up, the company is funded by various investors like a bank or even individuals. When the company starts establishing itself in the market and start converting their debts into shares, the investors will acquire shares from the company equal to the value that they have funded. The share value depends on two factors;
- The economic value of the startup, while they are willing to convert debts into shares.
- The maximum value of the company that can be converted into equities.
One great advantage of acquiring a convertible debt is the fact that the startup company is not valuated economically until they prefer to enter the stock market or acquire a history of operation.
Thus they get to run the company on their own without any pressure from investors. But once the shares have been sold out, and then the company is subjected to pressure as it has to generate returns for its stock holders.
