If you don’t have a rich uncle who is willing to finance your startup take a deep breath and get ready to make your pitch to countless investors in the hopes of finding one that will take a chance on you. Getting funding is part of the startup process that people dread most because it is time consuming and at times undignified. However it is possible to find the necessary funds to turn your dream into reality but you must choose the right funding vehicle to increase your chances of success. Convertible notes have pros and cons and depending on your needs it can be the right vehicle to fund your startup.
What Is A Convertible Note?
If you choose to use convertible notes to finance your startup it basically means you are accepting a loan for your company. The investor can convert the loan and the interest rate accrued during the loan period into equity hence the name convertible note. The maturity of the note conversion depends on different factors taking into consideration the progress of the startup and additional investors. This can be anywhere from 30 days to several years.
Benefit Of Issuing The Notes
The benefit of issuing convertible notes is the great discount early investors receive when they decide to come aboard. They receive this discount because they assume greater risk. They receive considerations in the form of discounted shares between 10 to 40%. Factors relating to shares, investors and availability as well as other circumstances can affect the discount rate. The interest rate on the investment is in the range of 6 to 10%. The issue is complex with every variable changing the outcome of subsequent set of payments and discounts available to investors.
Disadvantages
Risk is part of every investment and how much risk you are willing to assume depends on how deep your pockets are and the time you are willing to give the startup to meet the operating objectives. More than nine times out 10 operating objectives will not be met on time by first time entrepreneurs. What this means is you and all the other investors who got in early have to come up with more money because without operating objectives you can kiss institutional investors goodbye and without them there will not be any discounted stocks to purchase. Achieving operational objectives does not guarantee the big investors but it is a good measuring stick.
Terms Of Repayment
The point of creating the convertible notes is in the hope that sometime in the future they will be converted. If they are not converted a different repayment method has to be structured and depending on the shape of the startup this can be great point of contention on occasion involving lawyers. You can choose different methods of payment taking into consideration dilution with interest rates, accruement and conversion.
Funding Environment
If you are a first time entrepreneur the best advice you can get is to have very, very smart professionals around you who have your best interest at heart. Don’t for a moment assume you are so bright you are impervious. The funding culture is a pond infested with very scary monsters that gobble up naïve entrepreneurs for breakfast, lunch and diner.
If you believe in your idea first of all never give up on it and second don’t sell it out to the highest bidder out of desperation. You can find different funding options offered by trustworthy and honorable professionals who want to see your idea come to fruition.
Photo and Video Credits
Robert Cochrane / FreeDigitalPhotos.net
