Which of the following is an instrument issued by a start-up company evidencing receipt of money initially as debt, which is repayable at the option of the holder? 

The correct answer is 'Convertible note'

Key Points

• Convertible Note:
  • A convertible note is a financial instrument issued by start-up companies to raise funds. It is initially structured as debt, meaning the investor lends money to the company.
  • It includes a provision that allows the debt to be converted into equity (shares) at a future date, often during subsequent funding rounds or upon achieving specific milestones.
  • This instrument is particularly suitable for start-ups because it delays the need to value the company at an early stage, which can be challenging.
  • The holder of the convertible note has the option to either get the money repaid or convert it into equity, making it flexible and appealing to investors.
  • Convertible notes are widely used in the start-up ecosystem as a means to attract early-stage investments while keeping the process simple.

Additional Information

• Share Warrants:
  • Share warrants are instruments that grant the holder the right to purchase shares of a company at a specific price within a certain time frame.
  • They are not considered debt instruments and do not involve repayment of money. Therefore, they do not fit the description of the question.
• Debentures:
  • Debentures are long-term debt instruments issued by companies to borrow money. They do not have a conversion feature into equity.
  • While debentures represent debt, they lack the flexibility of being convertible into equity, which makes them different from convertible notes.
• Preference Shares:
  • Preference shares are equity instruments that provide certain preferential rights, such as priority in dividend payments or capital repayment during liquidation.
  • They are not considered debt instruments and do not involve repayment at the holder’s option, making them incorrect in this context.