According to Robert Neivert, there are two types of convertible notes one being debt and the other being equity. Notably, if you have a mortgage on your house, car loan, or house loan, that is considered as a debt which you need to pay with interest. A convertible note which is in the form of debt is similar to the above loans only that if you fail to clear it on time, it converts to equity. As per the United States laws, a debt attracts a certain level of interest meaning that the longer you take to clear it, the more you will have to pay. As such, the more the investor converts, the higher the amount of equity they get. Secondly, there is a due date since you can’t hold on a debt forever. Below are several facts to know about convertible notes.
Repercussions of not paying on Time
In case you have a car loan, you are subject to a loan due date during which you should have cleared the loan and interest. In case you have not cleared, you will be forced to give the car back to the lender. This is the main problem with debt instruments especially if you are a start-up since it is hard to raise large amounts of cash. Notably, after debt instruments become due and you are unable to pay, you do around, and it is converted into equity.
What happens in case an investment calls a note?
Your company or business might be doing okay, but the due date might reach before you raise the loan amount. As such, the lender is at liberty of converting your company or business into equity which means that you will lose your business. However, this might not be profitable to the lender hence it is unlikely to happen, but there is a significant amount of risk.
Do Lenders always have the right to call a note?
Of course, there is every right to call a note, but it should only be done on the last day of the due date. However, you can call ahead of the due date to request an extension if you have the hope of raising the loan amount. Notably, if it is an equity note, you will not lose your company, but in case of a debt note, there is a high risk of losing the company.