Since we announced Accel Atoms, our pre-seed funding and mentorship program, we have received multiple questions from founders on how an uncapped convertible works.
Early-stage startup funding typically happens in one of two ways:
The first is called a ‘priced round’, where you raise money from an investor after mutually aligning on the company valuation. The investor writes you a cheque in return for a percentage equity in the company.
The other is through what’s commonly known as a ‘convertible’ where you get the dollars from the investor, but don’t immediately give away any equity. Instead, you build your business, and part with equity when you’re raising your next round of funding. The amount of equity you give away is based on the valuation during this new funding round.
Say you (and your co-founder) need capital to experiment with an idea. You are convinced that this has the potential to turn into something big, but it’s too early to put a number or valuation to it. A convertible is ideal in this situation. Since you don’t need to give the investor any percentage equity, you don’t need to figure out a valuation. You can simply take the money and focus on building your business.
For example, say an investor (A) agrees to give you a convertible of INR 1 Cr as seed funding. You use that capital to build out your product , and are ready for the next round in a few months. In the second round, a new investor (B) agrees to give you INR 5 crore, in exchange for a 10% stake. This values your company at INR 50 crore.
At this point, investor A gets equity in exchange for the INR 1 Cr they had initially invested. So in this example, they will get 2.2% equity (INR 1 Cr on a pre-money valuation of INR 45 Cr)
In this process, not only did you avoid worrying about the valuation at an early, formative stage of your business, you also avoided giving out too much equity too early. There is more nuance to the process, but these are essentially the benefits of taking this route. You can check out a simple comparison of priced and convertible scenarios here.
Now that you’ve understood how convertibles work and why they might be better choice for you, here are ways in which we have made Atoms more founder friendly:
At Accel Atoms, we have no valuation limit or discounts. We offer an ‘uncapped’ convertible and support our early stage founders in sharing equity at fair market valuation.
If you’re an early stage founder and passionate about what you’re building, we’d love to talk to you! You can apply for Accel Atoms here.