Startup Funding Espresso -- Convertible Notes Pros and Cons
Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing. There are pros and cons to using convertible notes. Startups use them primarily for seed rounds and bridge rounds. They are lower in cost, as the documents are simpler than equity terms sheets. They avoid setting a price, so they are easier to negotiate. It keeps the cap table simple as they start in debt form and convert to equity later. The downside is that they have few protective provisions found in equity terms sheets, such as board seats. Valuation is not fixed.\xa0 A later-priced round will set it and there\u2019s little control the investor has over it.\xa0 There are no tax benefits for a Qualified Small Business 1202, which applies only to equity investments. In summary, convertible notes are useful for launching a seed fundraise or even a Series A, as it lets the startup capture interest into the deal while searching for the lead investor. An equity round should be done to set the valuation and provide tax benefits and protective provisions for the investor. Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.Let\u2019s go startup something today.-----For more episodes from Investor Connect, please visit the site at: Check out our other podcasts here: For Investors check out: For Startups check out: For eGuides check out: For upcoming Events, check out For Feedback please contact info@tencapital.group