The Debt Has Two Faces
Lender today, investor tomorrow: the ins and outs of convertible debt
Convertible debt is a loan that can convert to equity under a certain set of prearranged circumstances-usually when the lender says so. If your company succeeds, the lender becomes an investor; if you break even or go into the red, they simply remain your lender.
For someone betting on an entrepreneur's idea and its potential for success, convertible debt creates a win-win situation. If the company is a success, the lender gets to participate as an equity investor. If the company does just so-so and can't foresee any exit opportunity, the lender can still call for repayment of the loan at the end of the term.
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