After formation, most founders face the same question: how do I inject cash into the company? The answer depends on your stage, your goals, and how much complexity you are willing to assume. This installment of the Founders’ Toolkit provides a high-level overview of the three primary fundraising methods available to early-stage, venture-backed startups: convertible notes, SAFEs, and equity financing rounds.
1. Convertible Notes
A convertible note is a debt instrument through which an investor lends money to your company. The principal and any accrued interest will convert into preferred stock upon a “Qualified Financing,” which is typically a bona fide financing round where the company issues preferred stock or raises a specified dollar amount. Most convertible notes have a term of 12 to 24 months, during which interest accrues, and at maturity the note is either repaid with interest or converts. Because the investor is taking an early risk on the company, the investor receives a discounted price per share upon conversion, calculated using (i) a valuation cap, (ii) a discount rate, or (iii) a combination of both, with the investor receiving whichever yields the lowest price.
Click here to view the full article