Why convertible debt matters to a first-time founder
Taking convertible debt lets you raise money without agreeing a valuation, but it is still debt until it converts. If the next round never happens, the lenders may be able to demand repayment, which a young company rarely has the cash for. When it does convert, the terms decide how much of the company the lenders receive, so dilution is set by clauses you sign today.
Examples of convertible debt
Expecting to raise in six months, a company borrows ¥8 million from two existing investors as a bridge loan at 8% a year, converting into shares at the next round. The round closes eight months later, and the ¥8 million plus about ¥430,000 of interest converts into shares at the round price. Had the round failed, the loan would have fallen due for repayment unless the lenders agreed to extend it.
Common misunderstanding
People treat the money as a simpler version of equity financing, or as cash with no ownership attached. Equity financing sells shares now. This delays the sale of shares. It does not cancel it. “We will sort the percentage later” is the sentence that makes the next round unpleasant.
When to use it
Use it when you need the money before you are ready to agree a price for the company, and the lender is happy to wait for that price. Before you sign, write down what the loan becomes, and what happens if nobody invests again.