Convertible Debt Law and Legal Definition

Convertible Debt is a security which can be exchanged for a specified amount of another, related security, at the option of the issuer and/or the holder. It is an investment structure frequently issued by startup companies when raising seed capital from angel investors. With convertible debt, the startup issues the angel investor a promissory note, for the angel’s investment amount that contains a conversion feature. The conversion feature is the mechanism by which the debt (the promissory note) will convert to equity (new shares for the investor) upon a future event, such as an Automatic Conversion.