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CA Final · Advanced Financial Management · Startup Finance

Meera, a founder of a fintech startup, is considering a convertible note from an investor in an early round, instead of pricing the equity immediately. Which statement best describes the main feature of this instrument?

A convertible note is debt that converts into equity at a later priced funding round, usually at a discount or subject to a valuation cap. Its main benefit for early-stage startups is that it defers the difficult valuation decision until the company has more traction.

  1. AIt is debt that converts into equity at a later priced round, often at a discount, so valuation is deferredCorrect
  2. BIt is a permanent equity share with no maturity and no conversion terms
  3. CIt is a secured term loan that must always be repaid in cash with no conversion option
  4. DIt is a derivative contract settled only in foreign currency

Explanation

A convertible note is initially debt that later converts into equity, usually at a discount or with a cap, on a subsequent priced round. This lets early-stage firms defer valuation. The other options describe equity shares, plain secured loans and forex derivatives, none of which fit.

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