Decoding Convertible Notes: Understanding Rates, Maturity & Valuation

If I am offered the right to invest in a convertible note with 6% pay I’m kind interest, 2 yrs maturity, at 20M pre money, what does that mean?

When you're offered the right to invest in a convertible note with the terms mentioned (6% annual interest, 2-year maturity, and $20 million pre-money valuation), these are the main points to consider:

1. Convertible Note: A convertible note is a type of debt instrument used in early-stage funding rounds. The money invested is initially considered a loan, with the expectation that it will convert into equity (i.e., ownership in the company) in the future, typically during a subsequent funding round or when the company reaches certain milestones.

2. 6% Per Annum Interest: The interest rate on the convertible note is 6% per year. This means the principal amount you invest will accrue interest annually, and when the note converts or is paid back, you'll receive your percentage of the accrued interest.

3. 2-year Maturity: The note has a 2-year maturity term, which means that if it doesn't convert into equity before the end of the 2-year period, the company must repay the principal amount, plus any outstanding accrued interest, at the end of that term.

4. $20 Million Pre-Money Valuation: Pre-money valuation is the estimated worth of a company before it raises any external capital or financing. In this case, you're being offered the opportunity to invest in the company, which has a pre-money valuation of $20 million. When the note eventually converts into equity, your ownership percentage will be assessed based on the pre-money valuation of the company and your investment amount, in conjunction with any other valuation terms that may be part of the convertible note (such as conversion discounts, valuation caps, or liquidation preferences).

Keep in mind that investing in early-stage startups through instruments like convertible notes carries inherent risks, including the risk that the company may not succeed or that the investment may not generate the expected returns. Before investing, it's essential to assess the company's business plan, product or service, management team, and growth prospects, and to consult with professional legal and financial advisors to understand the potential risks and rewards associated with the investment.