Convertible debt with an equity kicker – these days usually a discount on the conversion price – has been a part of the venture capital landscape for as long as I have been in the space, which takes it back thirty some years. In the beginning, it was used mostly in the context of bridging a company cash for several days or maybe weeks while the company and its investors tackled the complexities of moving money and documents around when FedEx was in its infancy, fax machines with crinkly paper were costly and unreliable, and word processing was a cost center run more or less like the typing pools of the 1950s.
More recently, the convertible debt structure (and its cousin, convertible equity) has been adapted to seed stage financings, mostly as a way for investors and entrepreneurs to keep costs down and avoid talking about the elephant at the negotiating table – valuation. And for good reason: with the right facts, a modest convertible debt deal can be a great way to move a company from the back-of-the-envelope hypothetical stage to the ready-for-serious-capital launch phase.
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