Convertible debt is a type of financing that allows a business to borrow money from a lender or investor with the intent to repay the loan or convert it into equity under certain predetermined terms called “conversion privileges” . It is a hybrid security with debt- and equity-like features. Here are some key points about convertible debt:

• Definition: Convertible debt is a loan or debt obligation that is paid with equity or stocks in a company. It is a debt investment that can convert into an equity investment at a later date.

• Features: Convertible debt starts off as a loan, but the lender and the company have options to convert the debt to equity under certain predetermined terms. It is often used by high-growth early-stage companies. Convertible debt typically has a coupon rate lower than that of similar, non-convertible debt.

• Benefits: Convertible debt allows companies to raise capital quickly and less expensively than equity, and as a feasible alternative to obtaining a vanilla bank loan. It can help companies minimize negative investor sentiment that would surround equity issuance.

• Variations: There can be a number of variations within a convertible debt deal. In some cases, the debt will convert into common shares, while in other cases, it may convert into preferred shares. The specific timing and conditions, as well as the value of the equity awarded in exchange for the debt, does vary from one deal to the next.

• Risks: One of the biggest risks associated with convertible debt is dilution. Dilution occurs on conversions when other investors besides the original investors begin buying shares of stock.

Overall, convertible debt is a flexible financing option for companies that allows them to raise capital quickly and less expensively than equity, and as a feasible alternative to obtaining a vanilla bank loan.