I'm learning as much as possible about the funding mechanism of convertible notes. I understand that they are a loan until they convert to equity in the future once a more reasonable valuation is established. I realize they aren't given out to just everyone, and that companies who earn a convertible note are ones the investor believes will succeed based on team, product, etc. But some will still fail before their first round of funding. What happens to the convertible note?

Convertible notes can be a quick efficient way to get first investor dollars in. In most cases if the company doesn't make it to the next round or milestone, the company simply dissolves and everyone moves on to next. But be careful... If the noteholders continue to like parts of the IP, vision, or everything but you... in default they effectively own the company with no obligations to you and absent making the note whole have a pretty straight line there.

Answered 3 years ago

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