Convertible notes
Convertible notes are debt instruments that can transform into equity at a set date or at the holder’s discretion. They offer a return between a straight bond and equity, with an upside option if valuation rises.
In practice
An SEO SaaS startup raises €2M in convertible notes at 5% over three years, convertible at a 30% discount on the next funding round. If valuation reaches €20M, the investor converts and captures the upside; otherwise the capital is returned with interest. This structure lets the startup avoid a constraining immediate valuation while giving the investor downside protection through the fixed yield.