Convertible notes are a type of debt financing that can be converted into equity at a later date, typically at the next funding round or upon the occurrence of certain events, such as the sale of the company or the completion of an initial public offering (IPO).
Convertible notes are often used by startups as a way to raise capital without having to immediately value the company. This allows the startup to focus on building the business and achieving key milestones before determining the valuation and issuing equity to investors.
Convertible notes typically have a maturity date, at which point they must be repaid or converted into equity. They also usually have a conversion discount or a conversion cap, which are used to determine the conversion price of the notes into equity. Conversion discount is the percentage off of the next equity round price at which the note will convert and conversion cap is the maximum valuation of the company at which the note will convert.
Convertible notes can be used as a bridge financing, to provide startups with the capital they need to achieve key milestones before their next funding round, or as a way for investors to gain exposure to a startup without having to commit to a valuation.
Convertible notes are a popular form of debt financing in India, particularly for startups and early-stage companies. They are used as a way for startups to raise capital without having to immediately value the company, and for investors to gain exposure to a startup without having to commit to a valuation.
In India, convertible notes are typically used as a bridge financing mechanism to provide startups with the capital they need to achieve key milestones before their next funding round. These milestones can include product development, customer acquisition, or other key business objectives.
Convertible notes in India are typically governed by the Indian Contract Act, 1872, and the Indian Stamp Act, 1899. The Indian Contract Act applies to all agreements, including convertible note agreements, while the Indian Stamp Act applies to the stamp duty on the instrument.
Convertible notes in India typically have a maturity date, at which point they must be repaid or converted into equity. They also usually have a conversion discount or a conversion cap, which are used to determine the conversion price of the notes into equity.
It's worth noting that the Indian tax laws provide a tax benefit to the investors, in the form of a tax deferment, as the gain from the conversion of debt into equity is taxed only at the time of sale of equity shares and not at the time of conversion of debt into equity.