convertible-debt

Vocabulary Word

Definition

'Convertible debt' is a type of loan that the borrower can later convert into a different kind of investment, usually company stock. It's like lending money to a friend and later choosing to use that loan to buy a piece of their business instead.

Examples in Different Contexts

Convertible debt in startups is a loan that can be converted into equity, typically at a discount, during a future financing round. A startup CEO might say, 'We chose convertible debt for our initial funding to delay valuation discussions until our next funding round.'

Practice Scenarios

Tech

Scenario:

The software development is progressing well, but we'll need more funds for testing and deployment. We also want to provide potential investors a flexible option.

Response:

Why don't we consider offering convertible debt? It will not only fund our operations but also give potential investors a conversion option to stock at a later stage.

Financial-Markets

Scenario:

As a broker, I have clients looking for investments that provide income now and potential growth for the future. The company they're interested in is also seeking funding.

Response:

Convertible debt could be a perfect solution. It will give clients an income through interest payments now and potential equity in the company if the stock price goes up.