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CS Professional · Strategic Management and Corporate Finance · Sources of Corporate Funding

Which feature chiefly distinguishes a convertible note or compulsorily convertible preference share used in start-up funding from plain equity at the time of investment?

Convertible instruments let the investor and founders postpone or formula-fix the valuation until a later event, and preference-type instruments give a preferential claim before conversion into equity. They are not permanent debt, do not require listing, and do not give control without shareholding.

  1. AIt carries no possibility of ever becoming equity
  2. BIt allows the investor to defer fixing the final valuation or to receive a preferential claim before converting into equityCorrect
  3. CIt requires the start-up to list on a stock exchange immediately
  4. DIt gives the investor management control without any shareholding

Explanation

Convertible instruments convert into equity later, on a trigger or at a pre-agreed formula, so valuation can be settled at a later round, and preference shares rank ahead of equity for dividend and capital. They do convert to equity, need no listing and do not give control without shareholding.

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