Image Alt Text
funding

Convertible Note

Raising money is vital for every small business owner. As an entrepreneur, you have a few potential sources available. These traditionally include bank loans or investments from angel investors or venture capitalists in exchange for equity in your company. A bank loan can help you get money, and an equity investment from an angel or venture capitalist also provides you with professional business advice from someone who has done this many times before, in exchange for a percentage of ownership to the investor.

If you’re concerned about giving up part of your company, you have another option available. Another way to raise money from professional investors without initially giving up equity is a convertible note. A convertible note starts out as debt (think of it as a loan or a bond), but it can be converted to equity on a predetermined date. You get the money you need upfront. If you pay the note back completely before one of the conversion dates, you never have to give up equity in your company.

Convertible notes are usually used in situations where the startup involves high risk with the potential of high reward. Typically, a low-risk company will not pursue convertible notes for funding purposes. Some of the main advantages of a convertible note include a simplified funding structure and potential tax benefits over equity. One of the potential disadvantages is a possible loss of voting control if the note is converted down the road. There is also a cash flow risk that increases as the maturity of the convertible note decreases.

Overall, convertible notes are an interesting way to raise funds from professional investors. They start out as debt and can convert to equity later in the note’s life. This mix of debt and equity characteristics may be perfect for your business’ funding needs.


Related Articles

Your privacy

We collect data when you use our website to improve its performance. Doing so also helps us provide a secure, personalized experience. Select 'Accept cookies' to agree or 'Cookies settings' to choose which cookies we use. You can change your preferences anytime by clicking the 'Manage cookies' link in the footer.

Choose your cookie preferences

Some cookies are needed to make our website work and can't be turned off. But we need your consent to use others that are not essential. You can make your choices below and update them at any time using the 'Manage Cookies' link. To find out more, visit our Cookies Policy.

These cookies are necessary for the site to function. They also help us keep your data safe.
These cookies allow us to enhance your experience and remember your preferences, region or country, language, and accessibility options.
These cookies tell us how customers use our website. We study and organize this data to help us optimise our content and provide you with personalised experiences.
These cookies help us provide you with relevant communications and ads in our products and on other sites.

Looking for something else?

Get QuickBooks

Smart features made for your business. We've got you covered.

Firm of the Future

Expert advice and resources for today’s accounting professionals.

QuickBooks Support

Get help with QuickBooks. Find articles, video tutorials, and more.