Should you consider raising funds through convertibles?

Convertibles offer investors the chance to invest now and receive a discount in shares next time the company goes through a funding round. 

They allow you to raise funds quickly without having to undergo the process of valuing the company. 

Common in Silicon Valley, the instrument is now available to European crowdfunding investors for the first time. 

Jeff Lynn, co-founder and CEO of Seedrs said: “Convertibles offer a real alternative for startups between funding rounds because they are fast, easy and don’t require the parties involved to agree a formal company valuation.”

To take an example from Seedrs’ website, an investor puts in £1000 now for a discount of 20% when the next funding round comes.

At the next full funding round, a new investor puts in £1000 and receives 100 shares. But because the first investor bought in earlier with convertibles, they receive 125 shares in return for their £1000. 

There are two other ways the investment can be converted into shares. 

Firstly, the convertibles have a long-stop date of one year, which means that if a full funding round hasn’t been completed in that period of time then the investment will be converted at the valuation used for the previous funding round. It’s important to be aware of this because it could mean giving away a larger chunk of equity away than intended, if you fail to raise another round. 

Secondly, if the company folds then the convertible is handled in the same way as any other debt or equity investment so would be treated as a loss except for what will be claimed back by liquidators.

The first company to take advantage of Seedrs’ convertibles option is Future Ad Labs, a tech startup which has created clever branded games to replace those annoying CAPTCHA forms you need to fill in online to prove you are a human. 

The company previously raised £60,000 from 70 investors through Seedrs in 2012, before securing £1m in venture funding last year. It is seeking £300,000 for convertibles offering a discount of 15 per cent.

Share this story

Close
Menu
Send this to a friend