The way I understand it is that there are three main parameters to a convertible debt investment.
- An investment amount
- A discount rate
- A trigger event
Now under most of the examples I have seen, a trigger event for a given investment will occur, a post money valuation will be made based of the subsequent investment, at that point the convertible debt will be converted and a discount rate applied to it to calculate the initial investors final equity amount.
However I have on numerous occasions seen the discount rate being referred to as an "interest rate" and I stand confused in trying to understand if the length of time till the trigger event somehow effects the final discount rate of a convertible debt investment.
So say for example you negotiate a convertible debt investment with a 12% discount rate, does this mean that if the trigger event occurs in 1 month you might only have a 1% discount rate?
Fundamentally what I am asking is, does time have an effect on the discount rate or is this a set value regardless of the period of time elapsed till the trigger event? If the value is set, why is it often referred to as an interest rate?