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Fundraising: What happens to a convertible note if the company fails?
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Tom Schreiber, Startup Strategy & Execution answered:

Convertible notes can be a quick efficient way to get first investor dollars in. In most cases if the company doesn't make it to the next round or milestone, the company simply dissolves and everyone moves on to next. But be careful... If the noteholders continue to like parts of the IP, vision, or everything but you... in default they effectively own the company with no obligations to you and absent making the note whole have a pretty straight line there.

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