As a physician stepping into the world of private healthcare investing, one of the first things you'll encounter is how funding rounds are structured. The two most common types are convertible notes and equity rounds. Both can lead to ownership in a company, but they work very differently.

Here’s what you need to know.

Convertible Notes: Invest First, Convert Later

A convertible note is essentially a short-term loan to the company. Instead of paying you back in cash, the startup agrees to convert your investment into equity at a later stage, typically when it raises its next funding round.

Why companies use them:

• They are faster and cheaper to issue than formal equity rounds

• Valuation is deferred until the next round, when the company has more traction

What this means for you:

• You won’t immediately receive shares

• You typically receive a discount (for example, 20 percent) or a valuation cap so that your investment converts into equity at a more favorable price

• You are rewarded for taking early risk

Example:

You invest $50,000 in a convertible note with a 20% discount. When the company raises an equity round at a $20M valuation, your investment converts at a $16M valuation—giving you more equity for the same amount of capital.

Equity Rounds: Buy Shares at a Set Valuation

In an equity round, you invest directly in exchange for ownership in the company. The valuation is agreed upon at the time of your investment, and you immediately receive shares, typically in a preferred share class.

Why companies use them:

• Valuation is already established

• Often used when the company has reached a more advanced stage

• Institutional investors tend to prefer the clarity and structure of equity rounds

What this means for you:

• You know exactly how much ownership you’re getting from day one

• You’ll often receive shareholder rights, such as voting, dividends, or protections in case of acquisition

• There’s more legal documentation involved

Example:

You invest $50,000 in an equity round at a $20 million valuation. That gives you 0.25 percent ownership in the company immediately.

How to Decide

Key Takeaway

Convertible notes and equity rounds both provide access to ownership, but they reflect different stages of a startup’s journey. If you're backing a young healthcare company that’s still building clinical evidence or awaiting FDA approval, a convertible note is likely what you’ll see. If the company is further along with a clear valuation, you may be offered equity directly.

Understanding these structures helps you ask the right questions and protect your capital while supporting innovations you believe in.

Let me know if you'd like a follow-up article on how valuation caps and discounts work or a primer on SAFE notes and how they differ from convertible notes.