In the US system, when investors purchase convertible notes from a startup, the startup issues the shares to all investors simultaneously and pledges them as collateral for each c.n. transaction.
Convertible notes allow holders to return principal or convert them into shares upon liquidity events, ensuring investors can capitalize on a successful sale or IPO.
Investors in convertible notes do not participate in management but have voting rights concerning the consummation of monetization and liquidity events.
Priority is maintained with A notes which are senior to Seed notes, ensuring that A notes holders first make a decision during a liquidity event.
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