Here’s where deals can get more sophisticated—but also more dangerous if you don’t paper them correctly.
Let’s say you borrow $100,000. The lender gets 10% interest and two points. That’s a clean loan. But now both sides start thinking ahead:
• If the deal goes really well, the lender may want to convert the loan into equity.
• If the deal goes sideways, the borrower may want to convert debt into a partner instead of defaulting.
• Or maybe, down the road, that lender converts again into a full investor when you raise additional capital.
This is where convertible notes come into play.
Convertible debt can be legitimate if it’s structured properly, clearly defined, and negotiated upfront. The conversion triggers, valuation method, timing, and control rights must all be spelled out in writing. Otherwise, you’re drifting into blended lanes that can cause securities issues or investor disputes.
Convertible strategies are powerful—but only when the rules are clear before the money changes hands.
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