Convertible note
A short-term debt instrument that converts to equity on specified triggers (typically priced equity round).
Definition
Convertible note is debt that converts to equity at a future priced equity round, typically at a discount and with a valuation cap. Common in seed-stage fundraising. Issuance is a regulated securities offering.
Context
More common with C-corp structure than LLC; LLCs can issue convertible notes via Operating Agreement amendment.
Example
A SaaS LLC raises $250K via convertible notes with $5M valuation cap and 20% discount. Notes convert to equity at next priced round.
Common pitfalls
- Securities regulation (Reg D or Reg S) applies.
- LLC equity conversion has tax implications.
- Convertible notes are debt until conversion; interest accrues.