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CMA Final · Entrepreneurship and Startup · Types of New Age Business

Case: Pixelnest's founders plan to raise growth capital. Which statement about a convertible note or similar instrument used at its early stage is most accurate?

A convertible note is debt that later converts into equity at a subsequent priced funding round, usually with a discount or valuation cap for the early investor. It lets founders and investors defer setting a valuation while the startup is young and hard to value.

  1. AIt is debt that converts into equity at a later priced round, often at a discount or valuation cap, deferring the valuation negotiationCorrect
  2. BIt is a permanent equity share with fixed dividend and no conversion feature
  3. CIt is a bank term loan secured on receivables that can never convert
  4. DIt is a grant from government that carries no repayment or dilution and no conditions

Explanation

A convertible note starts as debt and converts into equity at a later qualifying round, usually with a discount or cap that rewards early investors, and it lets founders postpone fixing a valuation. The other options describe fixed-dividend shares, secured bank loans and grants, none of which match.

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