Are convertible notes the right way to fund your startup?

Welcome to TechCrunch+ Tuesday

Everyone loves an underdog, which is why investors and tech journalists are so fond of discussing startups that launched during the Great Recession of 2008, like Airbnb, Uber, WhatApp, Mailchimp, Square and Venmo.

It’s possible that your pre-seed, pre-revenue startup could similarly defy gravity, but in July 2022, it’s going to be difficult to find many investors who want to bet on a company with no traction.

If your company is too nascent to be valued, convertible notes might be a viable way to secure early financing. Basically short-term debt that converts into equity, these notes can be a boon for companies nearing their tipping point.

Julie Gionfriddo, director of advisory services at Fiondella, Milone & LaSaracina LLP, wrote an overview for TC+ that weighs the benefits and drawbacks of fundraising with convertible notes, along with some strategies for getting started.

Raising early money this way provides some obvious benefits: for example, “they typically don’t come with any control or board seats.”

However, notes can also create risk, like setting valuation caps too low, failing to raise enough capital, or other poor planning that can hand investors more equity than you intended.

Bottom line: If your company is on the cusp of an opportunity, convertible note financing could be a way forward, but only if you have a realistic valuation and a plan to reach it.

Thanks very much for reading TC+ this week!

Walter Thompson
Editorial Manager, TechCrunch+
@yourprotagonist

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