Entering Convertible Debt

Convertible Debt (also known as a "Convertible Loan" or "Convertible Note") is a type of loan that converts to investor equity. For example, an investor might agree to lend you a sum of money to start your business. But then, instead of making cash payments on this loan, you'd pay the investor back in the form of an ownership stake in your business.

When does that conversion from loan to equity happen? It happens when a future event occurs, and you and your investor will agree beforehand on what that event is. Common examples are securing a second round of funding or reaching a certain level of profitability. 

Because the agreement begins as a loan, it involves an interest calculation, and this interest causes the lender's investment value to grow month by month. At the end of the loan, the investor's financial stake will be larger than the original amount of the loan. 

To represent Convertible Debt, you'll need two entries:

You'll also need to decide which month of your forecast you predict this conversion will happen. 

Entering Initial Loan

1

Under the working capital tab of the financial forecasting tool, Click on the Funding tab, and then click Add Funding option:

TIP: Moving finance items from one group to another is hassle-free. For a detailed walkthrough, check out our help guide here.

2

Enter a name for the loan(borrowed on interest), and select the funding type as Other Financing (Borrowed):

3

Toggle the switch if this funding existed before the plan started. Enter the total loan amount and set the fund's receiving date.

Input the interest rate in percentage and select the interest start date. Choose the option accordingly whether you expect to repay the loan within 12 months and click on save.

NOTE: A loan you'll pay back within 12 months is considered short-term debt in your financial statements. A loan you'll pay back in more than 12 months is considered long-term debt.

4

Amount Received: Enter the amount of money you'll receive and when you'll receive it. You can enter a single amount in a single month or amounts in multiple months, depending on how your loan is structured, The system will automatically calculate interest on the loan and other parameters using the standard loan formula:

5

Amount Repaid: Enter the amount you plan to pay back each month or year against the balance. Locate the month in which you predict that the loan will be converted to equity. Enter the principal amount of the loan plus interest in this month.

NOTE: If you aren't sure of your payment amounts, you may want to consult your lender, or do an online search for a loan payment calculator.

6

Whatever updates you make in the excel sheet are set on autosave mode. Close the overlay.

Conversion to Equity

1

Under the working capital tab of the financial forecasting tool, Click on the Funding tab, and then click the Add Funding option:

2

Enter a name for the investment, and select the funding type as Investment(i.e. Owner's Contribution, Common Stock or Preferred Stock, etc).

3

Toggle the switch if this funding existed before the plan started. Enter the full amount of the original loan plus interest. Select the same month in which you represented the loan entry being paid in full and click on Save.