The conventional method in which this kind of funding exists is just what is referred to as “convertible debt. ” This means the investment doesn’t have a valuation put on it. It starts being a financial obligation tool ( ag e.g. A loan) that is later on changed into equity during the time of the financing that is next. Then this “note” may not be converted and thus would be senior to the equity of the company in the case of a bankruptcy or asset sale if no financing happened.
Then this debt is converted into equity at the price that a new external investor pays with a “bonus” to the inside investor for having taken the risk of the loan if a round of funding does happen. This bonus is frequently in the shape of either a discount (e.g. The loan converts at 15-20% discount towards the brand new cash to arrive) or your investor can get “warrant protection” which can be much like a worker stock choice for the reason that it offers the investor the best yet not the responsibility to purchase your organization in the foreseeable future at a defined priced.
There is certainly a reason that is primary inside investors give organizations convertible financial obligation instead of just providing you the amount of money as equity.