Many startup companies use convertible notes during the initial stages of raising money. Basically, the investor makes a loan to the company, and once an agreed upon event occurs, the debt owed to the investor converts to stock in the company. Much like a basic loan, a convertible note consists of providing money in exchange for a promise to repay the debt with interest at a future date. The main difference from a conventional loan is that the convertible note contains a mechanism in which the completion of a certain event will trigger the conversion of the debt into equity in the company. Typically, the agreed upon conversion event will be the acquisition of additional financing or the conclusion of a strategic partnership. In exchange for the investor taking the risk during the initial stage of investing, the debt will be converted into equity at a discount in the stock price given to future investors, usually between 20 to 40%. Convertible notes are also often referred to as “debt financing” or “bridge financing”.

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