Glossary / Discounted Convertible Note

Discounted Convertible Note

A discounted convertible note is a type of debt instrument that is issued by a company to raise capital. It is called a "convertible" note because it can be converted into equity (shares of stock) at a later date, typically when the company raises a subsequent round of funding. The "discounted" aspect of the note refers to the fact that the conversion price is lower than the price paid by investors in the subsequent funding round. This means that the noteholders receive a discount when converting their debt into equity. The discount is typically expressed as a percentage, such as 20% or 30%. For example, if an investor purchases a convertible note with a 20% discount and the subsequent funding round sets the price per share at $1, the investor would be able to convert their note into shares at a price of $0.80 per share. The purpose of the discount is to reward early investors for taking on the risk of investing in the company at an earlier stage. It provides them with a potential financial benefit when the company achieves a higher valuation in the subsequent funding round. Overall, a discounted convertible note is a financing tool that allows companies to raise capital while providing investors with the potential for future equity ownership at a discounted price.