Convertible Note Agreement
15. September 2021
After many sleepless nights, we rush for its next round of financing, the Serie A. They lure Khaki Capital to take the lead in the round. They say they will invest $2 million for a pre-money valuation of $8 million. You accept the term sheet and sign it. Lawyers get together and start doing DD. Everything is fine until they dig into the heading table and the convertible note. Since you lend money to a company, in most cases, interest is also due. However, unlike cash repayment, this interest returns to the invested capital, which increases the number of shares issued during the conversion. The main advantage of issuing convertible bonds is that it does not require the issuer and investors to determine the value of the company if there really isn`t much on which a valuation can be based – in some cases, the business can only be an idea. This assessment is usually defined during Round A funding when there are more data points on which an assessment is to be based. This was originally posted on my blog www.alexanderjarvis.com/2017/05/14/key-convertible-note-terms-that-no-one-understands-and-cost-you-big/.
If you need fundraising help or business model consulting, please contact us. They purchase a $1 million convertible loan („CN“) from certain angel investors. The note has a discount rate of 30% and a cap of $8m. You are trying to save money for legal documents by using a template that is formulated ambiguously. Anyway, series A is when the details are sorted, isn`t it? By not making a seed structure in series, you also postpone a negotiation on prices. All this usual thinking. But in principle, your documents are ambiguously worded and the details of what actually happens when you make the legendary A series are unclear. Will there be one or two price discussions? Find it later. One of the complaints about early-stage convertible bonds is that they represent an equity risk to debt returns. People try to approach this with the terms of the note – for example, caps for the conversion price and discounts on the conversion price. But these mechanisms do not fully correspond to the interests of the founders and bondholders, so in order to better address it, warrants are sometimes given to buy shares instead of or in addition to caps and discounts.
It obviously makes the rating more economically like equity, because warrants are literally equity, but warrants bring a bit of complexity into what`s supposed to be a simple transaction. You will find a more detailed explanation of share warrants: Sweetening the Deal for Angel Investors. No one knows the method by which stock prices are calculated for convertible bonds and are therefore the postal and pre-money price per share. Someone, if not everyone, will be unhappy. „equity“ means securities that are exchangeable or convertible at maturity and issued by the Company. For the purposes of this Communication, all securities are, in every respect, comparable to those issued by the company to other investors. The same conditions apply to all securities participating in the satisfaction of this communication, with the same rights and privileges as those that would be offered to other investors in accordance with the legislation in force. A convertible bond underwriting agreement is a contract for an investor to subscribe for a convertible bond, which is a debt instrument that is converted into equity on predefined terms.. . . .