Aldrich Law Firm, Ltd.
Aldrich Law Firm, Ltd.

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What to know about convertible notes

Nevada entrepreneurs who are looking to raise money for their companies may want to consider using convertible notes. Essentially, the note is a debt instrument that converts into an equity share of a company as more money is raised. For business owners, it is a simpler way to raise money because there is less of a need to put a strict valuation on the company. It may also be beneficial from a tax perspective.

With a convertible note, the value of the initial investment is determined by the valuation implied by future fundraising rounds. For the investor, it means potentially getting a better price per share in exchange for taking a risk by investing in a company with no set value. However, as a debt instrument, those who hold convertible notes don’t have the right to vote on matters like a shareholder would.

Therefore, some investors won’t invest in this manner as they would rather be a true stakeholder even if they have to pay more for that right. Another drawback is that those who have convertible notes want the value of the business to be as low as possible whereas shareholders want the opposite. As priced rounds become easier to complete, the convertible note may become even less appealing to both entrepreneurs and investors alike.

Business financing can be as creative or straightforward as a business owner wants it to be. Depending on the track record of the company, it may be possible to get a traditional loan or investment with relative ease. However, it may also be necessary to obtain financing from friends, family or by using personal savings. An attorney may be helpful in reviewing any agreement to accept a loan or other forms of funding from an investor or financial institution.

John P. Aldrich
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