Unlike Series A Rounds, most seed rounds of financing don’t have all investors fund their investment on the same date. Sometimes it’s a matter of logistics for investors, but mostly it’s because the startup is continuously identifying and pitching potential angel investors to join in the seed round. The startup can’t afford to wait to [...]
Most convertible notes have a price cap as a feature term. Depending on the delta between the price cap and the pre-money valuation of the qualified equity financing, the convertible note investors could receive a windfall in terms of liquidation preference. The Potential Problem Let’s say Series A investors invest at a pre-money valuation that [...]
It’s a common misconception that the ‘convertible note’ is the only legal document used in a convertible debt financing. I often receive emails from entrepreneurs asking for a ‘sample convertible note’ which I assume they are planning to use on their own. In addition to the convertible note, a startup will also need to draft [...]
The principal invested via a convertible note should accrue interest, but the rate of interest should be lower than a typical non-convertible loan from an investor. The range I see is 5-8% for convertible notes. If a potential investor plays hardball and insists on a high interest rate (i.e., 10% or more), then you might [...]
Just like the preferred equity financing process, the convertible debt financing process can start with a term sheet, rather than a full set of financing documents. A convertible note term sheet is beneficial because it postpones a lawyer from cranking out a full set of docs until consensus is reached regarding the convertible debt offering’s [...]
Startups don’t want to wait until every investor is ready before closing on a seed financing round. First, the roster of investors will not be identified and/or cutting checks on the same day. Second, what startup wants to wait on cash? Therefore, most seed financings allow for an initial close (i.e., that first investor check) [...]
If you follow this blog, you know that I think convertible debt is a good structure for a startup’s angel round. The main feature of the convertible note is that the debt investment made by the angel investor will typically later convert into equity. For this article, let’s assume this equity is the Series A [...]
Convertible promissory notes do not include a stated pre-money valuation. Instead, the convertible note seed investor and startup agree that the pre-money valuation for the convertible note investment will be determined by the pre-money valuation the startup receives at the Series A round. However, the convertible note investor does not receive the Series A pre-money [...]
Convertible debt is a type of security frequently issued by startups when raising seed capital. With convertible debt, the startup issues the seed investor a promissory note, for the investment amount, that contains a conversion feature. The conversion feature is the mechanism by which the debt (the promissory note) will convert to equity (new shares [...]
I previously mentioned that convertible debt is a good way to raise capital for most startups. The main reason why convertible debt is beneficial for startups is that it delays coming up with a valuation figure at the seed stage–the valuation conundrum is essentially punted to the Series A (or “qualified financing” stage). But what [...]
Ryan Roberts is a startup lawyer and represents technology companies through all phases of the startup process, including incorporation, seed & venture financings, and exit transactions. Click here to learn more about his practice.
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