Convertible Note

The term convertible note is used to denote a debt instrument by which a borrower promises a lender to repay a loan in shares in its stock when a specific event (such as an additional funding round) occurs.

Convertible notes are widely used by new companies which are not eligible to receive business loans from banks. By issuing convertible notes to investors, a company can raise investment capital while guaranteeing investors shares in its stock. By investing in a company’s convertible notes, an investor can take advantage of the company’s growth by gaining a right to the shares underlying the convertible note.

See also: Convertible bond; reverse convertible bond

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