Investors prefer convertible debt to equity investments because it gives them specific protections and a way to secure a discount on a future funding round:
Earn interest
CLNs and SeedNOTE typically come with interest, which the company pays to the investor. It’s a small but reliable way for the investor to get guaranteed value from their investment.
Be more protected if things go wrong
Because it’s considered a debt instrument before it’s converted, investors via SeedNOTE count as creditors. If your company is insolvent or going to liquidate or wind up, debt ranks higher than equity – so if there’s money available, creditors get paid (with interest) ahead of any shareholders.
Hedge their bets
With a SeedNOTE, if the company doesn’t meet its growth targets by raising a funding round, investors can get their money back plus interest. But if the company thrives, their loan converts to equity and they get a stake – often at a discounted price. It’s a win-win.