You might not yet have heard of convertible equity. It is somewhat new.
What is it?
It is a form of equity in a company similar to a convertible note, but:
- It is expressly not debt (and won't appear on the company's balance sheet as debt);
- It doesn't bear interest;
- It doesn't have a maturity date.
It is like a convertible note in that:
- It converts into equity later; e.g. upon the occurrence of a subsequent financing; and
- It can have a valuation cap and a conversion discount, just like convertible debt.
Why is convertible equity interesting? Because founders frequently think of convertible debt holders as equity investors. But convertible debt holders can have it both ways. They can be equity holders when the company consummates a qualified financing. But when the company doesn't reach that milestone they can remain debt holders and potentially demand repayment of their debt.
There are a number of different example convertible equity instruments online: