What am I buying when I invest in a startup?

1 Answer(s)

It’s almost always one of two things.

  1. Convertible debt: a note that will convert into preferred shares during a future round of funding. Investments structured this way usually have valuation “caps.” If a note is “capped” at $10 million, and the next round values the company at $20 million, your shares convert at the $10 million valuation, giving you more shares than new investors get. Notes typically pay 2% to 8% interest.
  1. Preferred equity (shares): takes precedence over common shares in case of a negative liquidation event. Founders and employees are typically issued common shares.
cremito Train Answered on September 7, 2015.
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