Question

What are the roles played by convertible debt in venture capital financing? Please give an in depth explanation

Answer 1

The convertible debt has a date of issuance , maturity date and interest rates. On the date, the debt is matured, the borrowers can either pay back the loan with cash or they also have the option the convert it into equity .  It facilitates capital investments from venture capitalists. It is a way for companies to raise capital during the initial stages of growth.

The decision to weather payback the loan or convert it into equity is based on the following factors:

• The value of the company, on the date of repayment.
• The outstanding balance of debt
• Other terms of debt as conversion caps and conversion discounts.

It helps a company to raise capital without making a public valuation. So, the parties mentioned in the contract will provide an estimate of the company's value. The company is given two options, either to pay back the loan with interest or to give the investors , equity in the company later on. So, the company can enjoy the flexibility of either repaying the loan or converting it into equity.This form of financing popular among the smaller companies , it is simple and inexpensive.