Is your business offering to sell newly-created stock? Selling newly-created stock at an agreed-upon price per share is what happens in a priced round. When the stock is sold, the investors are part owners. So, you get money through the sale of the stock. The investors receive partial ownership through the purchase of the stock. Convertible notes are short-term debt that converts into equity at a later time. The investor gives money to a start-up and the investor gets that future equity.
Convertible notes are attractive because they are simple, but that doesn’t necessarily mean that they are the best choice (regardless of the amount). With a priced round, you’re using a pre-agreed upon rate for the stock. With a note, the price of stock isn’t set at the time that you enter into the agreement.
Consider this with a note:
If the price if set low during the future round, you could end up with less equity in your own business than what you bargained for.
With a simple note, investors may not get other perks that they may want that they would get in priced rounds (board seats, certain types of provisions in the agreement, etc.).
This doesn’t mean that all convertible notes are bad. There is a time and a place, but they shouldn’t necessarily be your “go-to” tool for financing. If you’re participating in very small seed rounds, then a convertible note might be good for you. If you’re looking to supplement between priced rounds, a convertible note may be right for you.
Regardless of what you choose, though, make sure that all of your agreements are reviewed by an attorney who is on your side. LawTrades is a legal marketplace and we bring affordable legal help to start-ups. We’ve helped thousands of start-ups and we’d be happy to help you. In fact, we have a feature that you might find useful to get an answer to your convertible note versus priced round decision. It’s called. With it, you play a flat fee (usually $25) and you get to ask one of our experienced attorneys a question. You’ll get the answer for your specific situation within 48 hours.