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How Convertible Notes make fundraising seamless for startups?

If you’re a seed or early-stage startup in need of funds for hiring and operations, you may find it difficult to determine a fair valuation. That’s where convertible notes come in.

A convertible note is a short-term debt instrument that startups can use to raise funding. It allows holders to convert their debt into equity in the company at a future date. The biggest advantage of convertible notes for early-stage startups is that they don’t need to determine the value of the company when issuing them.

Unlike traditional equity financing, issuing a convertible note is quick and efficient. There’s only one document to deal with, which saves time and money for both the company and investors.

Until 2016, convertible notes were not legally recognized in India. However, the Companies (Acceptance of Deposits) Rules, 2014 were amended to recognize them as a fundraising instrument for startups.

DPIIT-registered startups can now raise funding through convertible notes, subject to certain conditions. The investment amount must be at least INR 25 lakhs in a single note and converted within 10 years. The terms of conversion must also be determined upfront.

By linking convertible notes to expected returns instead of valuation and percentage of ownership, startups can avoid the valuation quagmire that often comes with very early-stage investments.

     


Disclaimer

The content of this article is for information purpose only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of the statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Author / Treelife is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.

Last Updated on: 7th December 2023, 07:21 pm


Disclaimer:

The content of this article is for information purpose only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Author / Treelife is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.

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