Investing by using convertible notes means keeping 5 key things in mind:

You must gain a thorough understanding of what the business offers and the industry it operates in. Knowing what the business offers to the industry and how it differentiates from its competitors is crucial for a successful investment.

Understanding the company鈥檚 competition is crucial. You should ask yourself whether the company offers substantially different products or services from its rivals? Then ask, has the business perfected its product or is it still in the testing phase? Will the business require collaborators to add value to the product or can it survive on its own in the market? Lastly, what are the potential improvement and collaborative opportunities the business can explore?

Investors place the most weight on the current and projected profits. A thorough understanding of a company鈥檚 financial condition is integral before making a final investment decision. With start-ups, you should also be mindful of what databases are being used for the projections.

From here, you must inquire about any current liabilities, costs, or commitments that the business may have made. This includes accrued salaries, expenses, leases and any related product and service costs. This information will provide a more detailed picture when assessing the venture鈥檚 ability to withstand any upcoming downturns or unfortunate circumstances in the industry.

It would also be wise to consider the development of the company鈥檚 business and operating model. Identifying how the business plans to evolve, especially in fast paced industries like tech, can help predict the company鈥檚 growth prospects and chances of success.

Collecting and analysing financial information is a key part of any sound investment decision. Gathering all the information and documents possible will help you identify and understand the financial condition of the company. These include the financial statements, business plans and expansion plans and projected statements. You should also inquire about how the business plans on using the new investment funds.

Some start-ups may not have extensive financial records to share, but this should not deter you from doing your own research and thoroughly investigating the business. The company’s ability to maintain narrow margins while proceeding with the launch and growth plans is an important consideration as well.

Once the convertible notes have been drafted, you should carefully analyse them. The maturity date, principal amount, interest payable, and discount rate should be clearly stated and should be in accordance with the initial negotiations.

The investors will become shareholders once the convertible note converts into equity. All provisions and rights of the Shareholder鈥檚 Agreement will be awarded to them. That said, before this occurs, as noteholders the investors may ask for certain provisions and rights.

Noteholders may demand access to information such as periodic financial updates, rights to participate in equity raises in the future and the right to observe board meetings.