Convertible debt can solve a very common problem for early stage startups: it allows founders to delay determining the value of their company and still take money from investors.

The Easiest Example Ever

Let’s say you come up with an idea for a coffee-flavored lemonade stand. You don’t know if this will be a total flop or the next Starbucks, but you need $50 to get this lemonade stand launched.

You go to Uncle Earl. He’s willing to contribute $50, but since you can’t figure out what the value of the lemonade stand is—it’s not even launched yet!—he agrees to give the $50 now and figure out what percentage of the business he will get later.

Earl only agrees to do this because you offer him 3 financial incentives which make it interesting to ...