Last month, in my article about debt and equity financing, I mentioned another solution that some entrepreneurs have found to be a happy middle ground between debt financing and equity financing. That solution is convertible debt, which is simply a loan (a debt obligation) that can be turned into equity (stock ownership), generally upon the occurrence of future financing.
So what’s to like about convertible debt? At first glance, it seems like a rough deal for the entrepreneur looking for startup financing: It involves loan repayment, interest accumulation and, if things go well, loss of control associated with the sale of stock.