No Conversion: Typically, a convertible note converts to equity when the issuer engages in a subsequent round of financing when the value of the issuer is determined (a so-called “pricing round”). However, there is no guaranty that the issuer will raise more money. In that case the investor is left with merely a debt security, with all the associated risks.
Subordination To Rights Of Other Lenders: Typically, when you buy a convertible note on our Platform, while you will have a higher priority than holders of the equity securities in the company, you will have a lower priority than some other lenders, like banks or leasing companies. In the event of bankruptcy, they would have the right to be paid first, up to the value of the assets in which they have security interests, while you would only be paid from the excess, if any.
Lack of Security: The convertible notes sold on our Platform typically will not be secured by property, like an interest in real estate or equity.
Lack of Information About Value: When you buy a convertible notes the issuer will place a “cap” – a maximum – on the value of the company. Theoretically the cap works to your advantage, but in reality you will not be able to determine whether the cap is too high.
Lack of Input on Pricing Round: A convertible note typically converts to equity automatically in the event of a pricing round. However, the terms of the equity the company issues in the pricing round is being negotiated (if at all) by the new investors, not by you. In effect, you have to accept whatever form of equity they will accept.