Using convertible notes

On Behalf of | Jul 24, 2018 | Business Law |

Entrepreneurs in Florida who are interested in different ways to fund startups may consider using convertible notes. These notes are debts that change into equity when fundraising rounds take place.

One of the primary advantages of convertible notes is the simple way in which they are structured. It can take substantial money and time to execute startup financing rounds, and they can easily become complicated. In contrast, the financing for convertible notes are less expensive, less complex and take less time. Ownership stakes in the startup enterprise are sold in a priced round while the issuance of common stock or the creation of second-class shares are not necessary for convertible notes.

Entrepreneurs are able to avoid the various complications that can result from stock option grants, tax implications and valuations of the company. Entrepreneurs can devote the majority of their effort and time to their enterprise and on creating returns for investors.

A pre-money valuation, or the value of the enterprise when the investment is made, is an important factor of priced rounds. The valuation is used to dictate how much of the company is being offered; however, determining this value can be difficult for a lot of early-stage ventures. With convertible notes, the valuation negotiations can be postponed until a later round of financing. The company can use the time to create metrics through which a fair price can be calculated.

A business law attorney may offer a range of services to assist an entrepreneur with their financing efforts for a startup company. The attorney could verify that a client’s finance strategies are in accordance with the law.