convertible-equity

Vocabulary Word

Definition

In simple terms, 'convertible equity' is an investment that a person or company makes that can be changed into shares of that company in the future. Basically, it's like 'I give you money now, you give me your company's shares later'.

Examples in Different Contexts

Convertible equity in startup funding is an investment option where capital is provided in exchange for future equity, typically without a predetermined valuation. A startup founder might discuss, 'Convertible equity is advantageous for early-stage startups, as it allows us to raise funds without immediately valuing our company.'

Practice Scenarios

Business

Scenario:

We are considering various options to fund our next growth phase. One option could be issuing convertible notes which would allow investors to convert these notes into company's shares.

Response:

Raising funds using convertible equity can be a good option. It will allow us to avoid setting a valuation now while still providing capital for growth.

Tech

Scenario:

New startups often struggle to define their valuation early in their life. By offering convertible equity, they are signaling to potential investors that they are expecting substantial growth.

Response:

Convertible equity could be a fair option for investors. Since it delays valuation determination, it reduces the risk for early backers while providing us capital.