Loan Lesson
Is convertible debt the way to go?
Question: I'm trying to raise money to start a business, but I'm confused about valuation. How am I supposed to know how much of the company to give away to investors when I have no idea how much my business is even worth?
Answer: Determining the value of a startup without revenue, profits or product is never easy. That's why many early stage companies bypass the VC route and choose to raise money through convertible debt, a type of loan that pays investors a fixed annual interest rate (say, 8 percent to 10 percent) and also gives them the opportunity to convert their debt to shares of the company's stock at an agreed-upon price when and if the company gets acquired or goes public. Investors also get downside protection if the business fails and the company defaults.
Continue reading this article - and everything on Entrepreneur!
Become a member to get unlimited access and support the voices you want to hear more from. Get full access to Entrepreneur for just $5.
Entrepreneur Editors' Picks
-
This Co-Founder Was Kicked Out of Retailers for Pitching a 'Taboo' Beauty Product. Now, Her Multi-Million-Dollar Company Sells It for More Than $20 an Ounce.
-
Have You Ever Obsessed Over 'What If'? According to Scientists, You Don't Actually Know What Would Have Fixed Everything.
-
After He Was Fired From the UFC, This Former Fighter Turned His Passion Into a Thriving Business
-
Most People Don't Know These 2 Things Are Resume Red Flags. A Career Expert Reveals How to Work Around Them.
-
How One Woman Turned Pandemic-Induced Boredom and a Makeshift Garage Art Studio Into a Thriving Franchise
-
Use These 4 Self-Care Rituals for More Resilience and Less Depletion
-
Shark Tank's Barbara Corcoran Wants to Invest in 'Someone Who Probably Needs a Good Shrink Instead of a Business'
