Know about the Common types of Convertible Debt

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Convertible Debt

Your startup has successfully developed a product, and you are ready to launch it in the market. However, you need some capital to fund this game-changing phase of your business. So, how can you get the required funding? Convertible debt is the answer to this query, proving to be the optimal way to pursue your investors.

In recent years, the common types of convertible debt have stirred a particular interest in the negotiations between business owners and potential investors. Here are a few convertible instruments that are popular among founders in the startup community.

Convertible Note

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Convertible notes are one of the top investor-friendly convertible debt instruments, converting to equity later. It suits those investors who wish to delay finalizing a startup valuation until some other milestone in the future.

The valuation cap and discount rates depend on the terms of the convertible note. In terms of an equity funding round, either investment can convert to a lesser cap or get back original financing as maturity. Furthermore, convertible notes give various rights to the investors, and they can transfer this instrument, but only to affiliates.

Simple Agreement for Future Equity (SAFE)

Created by Y Combinator, SAFE is an easy way for investors to get funding quickly. It comes in varieties like cap and no discount, discount and no cap, cap, and discount, to name a few.

The valuation cap is viable, and it depends on the form of SAFE. The investments convert automatically to preferred stock when there is an equity round of any size. This convertible instrument does not have a maturity date and does not amass interest. One of the common types of convertible debt, SAFE, allows companies to give a basic set of representations.

Keep It Simple Security (KISS)

500 Startups developed the suit of KISS, which is an agreement between a company and an investor. Once the investor invests some funds in your startup, they receive the right to purchase shares in the future equity round. It maintains the user-friendly-ness of SAFE, and yet offers some of the investor protections available in convertible notes.

This convertible debt has a valuation cap and discount rates, but need not necessarily have an interest rate or maturity date. KISS gives investors the information rights to company financials and participation rights in all future equity funding rounds.

Simple Agreement for Future Tokens (SAFT)

Convertible debt has become a reliable form of investment among startups, owing to its speed and simplicity. It gives the option to choose the instrument called SAFT, which is not debt and does not convert into equity. It entitles the purchaser of the note to receive tokens at the rate that is in line with the contract. Created to help cryptocurrency ventures to raise funds without violating regulations, ICO triggers it when the invested company is ready to issue tokens.

This instrument works perfectly in the crypto ecosystem, helping the companies that raise money through cryptocurrency to adhere to international, federal, and state law.

Final Thoughts

Running a startup, you will know how hard it is to know your valuations, particularly when you neither have any customers, nor a beta product. Convertible debt instruments are excellent investor-based fundraiser tools to raise money until your company has customers, products, and meaningful valuation negotiations.