Question

1. In general, when are convertible notes used? Also, why do investors sometimes insist on convertible notes with caps? Please answer in 2-3 paragraphs

Answer 1

For a product is a little more than an idea on pappers,its starts collecting what known as seed funding from investors.hiistorically these early stage onvestors receive a share of the company in return for the investment but a founder cannot opt instead for whats called a convertible note .

A convertible note is a loan that an investor can give to a company that automatically converts in to shares of stock only after a company completes its next round of capital,the biggest reason to opt for a convertible notes is that it does not require them to give away any control with their company before its series a round of funding because a convertible note is a loan not a investment you can cut out a lot of complicated and costly papper works.

example if the founder and investor agree that the ceiling on the value of the start up is 5 million dollar but the start up endedup being valued at 10 million dollars the convertible note holder will receive stock at half the price of other investors during the series of funding but agreeing to caps can hurt founders especially if their series a round is smaller than expected .cap set a maximum price investors will pay for shares but they dont set a minimum price forcing the founder to take all the risk when it comes to pricing.

• convertible notes allows founders to retain control over the company
• cheaper and easier from a legal prespective
• investors demand maximum
• no minimum