Glossary·Written by a CPA
Convertible note
Also called: Convertible debt
A loan that can turn into shares of the company instead of being paid back in cash.
A convertible note is money a company borrows that the lender can later swap for stock, usually at a set price or a discount.
Here's the accounting quirk. When the company becomes more valuable, those notes become more valuable too, and accounting rules can make the company book that increase as a loss, even though no cash went out the door.
For you, that means a huge net loss isn't always what it looks like, so look past the bottom line to operating income and cash flow from operations.
Example. As an example, if a company's notes that convert into stock are worth $10 billion and the company's value doubles, those notes are now worth about $20 billion, and the $10 billion jump can show up as a loss on paper.
The catch. When the notes convert, the lender gets new shares, so the paper loss going away comes with dilution.
Where I talk about it
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This is education, not tax or investment advice. I'm a CPA, but I'm not your CPA. Full disclaimer.