i came across "convertible debentures" when reading a file for a public company. i didn't know what this term meant, so i went to look it up.. but then became more confused. there are sites that say these are the same and sites that say they are all different.

two common but very different explanations that i came across for these terms are:

  1. convertible bonds/notes/debentures basically allows investors to loan money to a company and have the ability to convert their principal to stock if the price of the stock goes above the conversion price before maturity date

  2. convertible notes/debts are a tool for investing in a start-up company that doesnt even have a value yet, and the value of the investment is determined later on by another investor

i hope someone can clarify for me which definition belongs to which term or if i got this all wrong

up vote 3 down vote accepted

They all basically mean the same thing - a type of debt than can be exchanged for (converted into) equity at some point. It's only the mechanics that can be different.

A convertible bond is structured just like a regular bond - it (usually) pays periodic interest and has a face value that's due at maturity. The difference is that the bond holder has the option to exchange the debt for equity at some point during the life of the bond. There can be restrictions on when that conversion is possible, and they typically define a quantity of equity (number of shares) that the bond can be converted into. If the market price of the shares goes above a price that would make the shares more valuable than the bond, it's in the best interest of the bond holder to convert.

A convertible note is typically used to describe a kind of startup financing that does not pay interest or have a face value that's redeemed, but instead is redeemed for equity as part of a later financing round. Rather than specifying a specific number of shares, the bond holder receives equity at a certain discount to the rest of the market.

So they both are debt instruments that can turn into equity investments, just through different mechanisms.

A debenture is a fancy word for unsecured debt, and convertible debt could be used to described either structure above, so those terms could mean either type of structure.

  • great explanation. thank you! – sculpter Nov 7 '17 at 20:55

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