Convertible debt is a type of financing commonly used by startups, where investors lend money to a company with the option to convert the [[loan]] into [[equity]] at a later stage, typically during a subsequent funding round. This financial instrument is important for startups because it provides them with the necessary capital to grow without immediately [[dilution|diluting]] ownership or setting a valuation, which can be challenging in early stages. If the startup fails, convertible debt holders typically become unsecured creditors and may recover only a fraction of their investment, if anything, during the liquidation process.