Start-up Corner: The Role of Different Convertible Instruments in Start-Up Financing

Jim Ryan, start-up columnist for The Journal of Robotics, Artificial Intelligence & Law, authored the article “The Role of Different Convertible Instruments in Start-Up Financing,” which explains how convertible instruments can help start-ups raise capital for high growth companies.

Start-ups of all sizes and at various stages of their life cycles need to raise capital. While selling shares may sound the simplest, doing so directly is not always the most efficient or appropriate choice. Raising capital by issuing priced equity requires agreeing to a fixed valuation of the company and, typically, a large variety of terms to govern the stockholders’ relationship with each other and with the company.

Another solution, particularly for pre-seed companies, is a convertible instrument. These are investment contracts that provide the holder a right to convert their investment into equity of the company if and when certain pre-determined events happen, such as a priced equity round (i.e., a Series Seed financing). Convertible instruments can vary, but the two most common are convertible notes and simple agreements for future equity (Safes).

Read the full article.