Book Now Book Now

Convertible Notes in Startup Fundraising

In the startup ecosystem, raising capital is a pivotal moment that can define the trajectory of a business. Among the many options available for securing funds, convertible notes have emerged as a genuine alternative for both startups and investors. This instrument, is essentially a loan that can be converted into equity, presents a blend of flexibility, efficiency, and strategic advantage.  

Allied Legal's commercial lawyers regularly assist startups and founders with navigating convertible notes. Connect with our commercial lawyers today.

The Essence of Convertible Notes

Convertible notes are a type of debt instrument that offer investors the option to convert their outstanding loan into shares in the company on the occurrence of specific trigger events. This mechanism provides a safety net for investors, allowing them to either reclaim their loan with interest or convert it into shares, potentially at a lower price than the market value.

The attractiveness of convertible notes lies in their simplicity and speed, eliminating the immediate need for a company valuation and the complexities of equity investment. However, it's crucial to navigate the implications of future share conversion carefully.

Impact On the Cap Table

The cap table is significantly impacted by convertible notes. They convert into shares upon specific events, such as a qualifying financing round, maturity date, or an exit event. Before conversion, investors hold a note-holder status; after conversion, they become shareholders. Planning and transparency are crucial in managing the dilutive effects of such conversions on existing shareholders.

Conversion Triggers and Processes

Maturity Date: If no qualifying financing or exit event occurs by the maturity date, note-holders may choose to convert their loan (plus interest) into shares. The conversion rate and share class are predetermined, often favouring the issuance of a higher class of shares to note-holders.

Qualifying Financing: This automatic conversion is triggered by a new equity investment round. Companies must issue a conversion notice to note-holders, detailing the share quantity and calculation method. The terms may include discounts or valuation caps, influencing the conversion share price and the number of shares issued.

Exit Event: Before an exit event, note-holders decide between cash recovery or conversion into shares. The terms set the conversion rate, often at a discounted share price, adjusted for valuation caps if present. This ensures noteholders partake in the exit benefits similarly to ordinary shareholders.

Issuance of Shares Upon Conversion

Converting convertible notes into shares requires a series of formal steps:

  1. Board resolution and possibly shareholder approval for share issuance.
  2. Adherence to shareholder agreements or deeds of access.
  3. Updating the company's registers for members and note-holders.
  4. Issuing share certificates to new shareholders and notifying regulatory bodies.

Key Takeaways for Startups

Utilising convertible notes for fundraising demands a thorough understanding of their potential impact on your company's future. Consideration of the trigger events, the calculation of share issuance, the influence of accrued interest, and the adjustments to the company's cap table are paramount. Equally important is the procedural adherence required to effectuate the conversion smoothly.

Convertible notes, while offering a streamlined path to funding, necessitate careful planning and communication with investors to align interests and expectations. By mastering these elements, startups can leverage convertible notes as a powerful tool in their capital-raising arsenal, paving the way for sustainable growth and success.

Connect with Allied Legal's Commercial Lawyers

Speak to Allied Legal's commercial lawyers today should you seek assistance.  

Connect with us at Allied Legal on 03 8691 3111 or drop us an email at to discuss how convertible notes could benefit your startup.

The insights presented in this article are derived from ‘What happens when Convertible Notes convert?’ written by Sophie Mao and published to Mondaq on 25 October 2022.

Related Articles


Privacy Law in Fintech: Allied Legal's Guide to Startups and Fintech Companies

Privacy law is important for trust in fintech. Allied Legal explains why following privacy law is not just a legal obligation but also a strategic imperative for fintech companies. It helps build trust with customers and reduces risks to their reputation.

Robo-Advisors and Wealth Technology: Exploring the Evolution of Automated Investment Platforms in Australia

In recent years, Australia's financial landscape has undergone a remarkable transformation with the ascent of robo-advisors and other automated investment platforms. These technological innovations, often referred to as Wealth Technology (WealthTech), are reshaping how individuals invest, providing streamlined solutions, and democratising access to wealth management services.

In this blog post, we will delve into the phenomenon of robo-advisors and WealthTech, examining their rapid rise, regulatory considerations, benefits for investors, and opportunities for WealthTech startups with insights from Allied Legal's team of expert commercial lawyers.

Opportunities for Fintech Startups: ESG Investing and Sustainable Finance Solutions in Australia

As the fintech landscape continues to evolve, environmental, social, and governance (ESG) considerations are increasingly gaining prominence among startup fintech companies in Australia. In this comprehensive guide, we delve into the growing interest in ESG investing and sustainable finance solutions and how fintech can capture this opportunity to provide solutions to the finance industry.


Subscribe to our newsletter to receive exclusive offers and the latest news on our products and services.

First Name
Last Name
Email Address

Need some help?

If you need assistance, why not book a call with us today? Or fill out the form below to book in for a free confidential consultation.