A convertible debt is a debt obligation wherein the lender has the option to convert the debt into ordinary shares in the company rather than receiving repayment in cash.
Convertible debt is becoming a popular investment model, mainly attracting savvy startup investors. Entrepreneurs are looking more closely into convertible debt as a financing option.
At first glance, a convertible debt may not seem to be an attractive option for an entrepreneur since this financing option involves loan repayment, interest accumulation, and possibly even loss of control due to the sale of stock (in case the lender does decide to go with the stock option repayment in favor of the cash payment option).
However, convertible debt is more accessible because it is has a decent return on investment, even with a small investment. An entrepreneur can turn to family and friends and consider them to be “angel investors” with the less chance of losing control over the business. Aside from this, one of the common terms in convertible debts is a discount or bonus upon conversion into equity, which benefits the entrepreneur.
