Imagine a situation where you go and buy a residential house for $1,000,000 without consulting a real estate agent or a valuer. This is somewhat akin to a convertible note. It’s where an investor would go and invest money in a startup without a valuation. If this sounds like a loan for the startup, it is. Usually, when the startup gets traction, the investor will be rewarded through a predetermined rate.
For example…
An investor really believes in startup building an innovative educational centre for children with learning disabilities. He puts in $50,000. In a year, the startup is in many of its target markets and is bringing in $150,000 in revenue annually. If the convertible note was issued with an interest rate of 2%, the investor has accrued $1000 in interest and can convert these to shares at the applicable rate.
