convertible debt
Convertible debt is money a startup borrows from an investor with a promise that the loan will later turn into shares instead of being repaid in cash.
In plain English
A promise ring is a fair comparison here. It is not a wedding yet, but it says something serious is coming, and the exact shape of that future gets decided later, once certain things are clearer.
Convertible debt works the same way between a startup and an investor. The investor hands over cash today, say ₦20,000,000 to a Lagos software startup building a payments tool, and the startup signs a note saying this is a loan, with interest, but with a twist.
Instead of demanding the ₦20,000,000 back with interest in cash, the investor agrees that when the startup raises its next proper funding round, or hits some agreed trigger, the loan converts into shares at a discount to whatever price new investors pay.
Both sides like this because nobody has to argue over what the company is worth right now, when it is basically two founders, a laptop and a big idea. That argument gets postponed to a day when there is more evidence, more users, more revenue, to argue about.
A Nigerian in London sending seed cash home to a sibling's startup might use this same structure, dressed up as a SAFE or a convertible note, so the money moves as a loan on paper but is really a bet on future equity.
If the startup fails and never raises again, the note usually just stays a debt the founders owe, which is the sobering part investors and founders both need to sit with before signing anything.
An investor lends a Lagos startup ₦20,000,000 as convertible debt with a 20% discount. A year later, new investors buy shares at ₦100 each, so the note holder converts at ₦80 each, getting more shares for the same money.
Questions people ask
Is convertible debt the same as a normal bank loan?
No. A bank loan expects cash repayment with interest on a schedule. Convertible debt expects the loan to turn into company shares eventually, and cash repayment is more of a backup plan than the main plan.
What happens if the startup never raises another funding round?
Then the note may simply mature as a debt, meaning the founders could owe the cash back with interest, depending on what was written into the agreement, so the fine print matters enormously.
Why do investors like convertible debt over just buying shares immediately?
Because it lets them invest early without forcing anyone to agree on the company's value right away, and the discount they get later rewards them for taking that early risk.
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