In poker, deuces are often called the wild card. You can use the card as a ‘Two’ or as any other card in the deck. In effect, you can convert the card to something else. Well, convertible debt uses the same principle in business. The holder of the convertible instrument has a choice, continue to collect interest as a debt instrument or convert the debt to equity.
A form of reduced risk exposure for a lender whereby a loan is the initial form of capital funding. At the end of preset period of time, the lender may convert the debt to equity by having stock issued in exchange for the principle portion of the debt. The lender general stands to gain in this situation as the stock price my rise significantly warranting the exchange of debt to stock.