Convertible Notes 101
As a startup founder, one of your most important roles and one which will occupy a significant amount of your time (and create a commensurate amount of stress) is raising capital to fund your business. The first formal round of investment capital raised is referred to as a seed round with consequent rounds termed alphabetically: Series A, Series B, Series C, etc. If you’re really killing it, you might have a mezzanine round and then even an IPO. Regardless, you will need to raise money to get out of the starting gate so prepare yourself with what you need to know.
One term that will come up early in the fundraising process is the convertible note. This kind of convertible is not as sexy as the shiny red kind, yet it is just as desirable for the startup founder. Why, you may ask?. Let’s get into the details.
What is a Cap Table?
When it comes to early stage fundraising, no question is too basic. Entrepreneurs are passionate about their companies. They are engineers, product gurus, visionaries and more. What they do not often have is a formal financial education or finance background. That’s totally okay. Entrepreneurs just need to be smart enough to find someone who can help them with this or know where to seek out answers. Understanding a company’s financials is important for every founder. I worked with a brilliant founder with an engineering background a few years ago. He and his co-founders had self-funded their SaaS company and were profitable and growing fast. A key customer of theirs, seeing the potential for the startup, came to them wanting to invest. One of the first things the customer/investor asked for was a cap table. The founder called me wanting to know how to respond. In very simple terms, here’s what what you need to know: