Full Definition
Convertible equity is a broad category of investment instruments that start as something other than equity and convert into company shares at a later date, typically during a subsequent financing round. The most common forms are SAFEs and convertible notes.
Types of Convertible Instruments
- SAFE: Simple equity right, no debt characteristics
- Convertible Note: Debt instrument that converts to equity
- KISS (Keep It Simple Security): 500 Startups' version, available in debt and equity versions
Why Use Convertible Instruments
- Avoids the need to set a valuation at very early stages
- Simpler and cheaper legal documentation
- Faster to close than priced equity rounds
- Defers complex equity negotiations to a later, better-informed stage
Real-World Example
A startup raises $750K through convertible equity instruments — $500K via SAFEs with a $6M cap and $250K via convertible notes with 20% discount.
Related Terms
A Y Combinator-created investment instrument that converts to equity in a future priced round.
A short-term debt instrument that converts into equity during a future financing round.
Ownership interest in a company, represented by shares of stock.
The maximum company valuation at which a SAFE or convertible note converts to equity.
The first significant round of funding for a startup, typically used to build an MVP and validate market fit.
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