The Complete Direct Investing Handbook by Kirby Rosplock

Author:Kirby Rosplock
Language: eng
Format: epub
ISBN: 9781119094722
Publisher: Wiley
Published: 2017-05-22T00:00:00+00:00

Convertible Notes

Convertible notes are typically issued in the form of a promissory note and offer holders the right to convert to equity upon the occurrence of specified events or to hold the note to maturity for repayment. The conversion rate is either fixed or variable and can increase over time or under certain conditions. The conversion is often triggered upon a “qualified financing,” which can be defined as a minimum dollar amount to be raised in a future capital round or another defined event. The note will convert at a discount to the price of the next round (usually 20% but can be between 15 and 50%) and will often include additional warrants. This discount and/or warrant coverage gives early investors additional ownership for taking on increased risk. The interest also converts along with the principal. The notes can be secured or unsecured and the maturity date should be sufficiently long to allow the company to achieve the next milestone in their growth trajectory.

Convertible notes are frequently used in early-stage angel financings where the business is too young in its lifecycle to assign a valuation. The convertible note benefits the investor by deferring valuation until the company is more seasoned while providing certain advantages to compensate for the risk. While a convertible note is senior to equity, investors must take into account the fact that many early-stage businesses fail without ever reaching a valuation event.

Advantages of Convertible Notes

Seniority in the capital stack

Provide all the advantages of both equity and debt

Simpler and usually faster to negotiate and execute versus a stock financing and there is no valuation debate

Although typically unsecured, it can be secured by assets of the company

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.