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The Rolling Close

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 […]

Price Cap Liquidation Preference Windfall Regulators

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. That is, the investor’s liquidation preference could exceed its original investment amount. The Potential […]

Convertible Note Interest

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 2-8% for convertible notes. Lower on the coasts and internationally, higher in the middle of the country. If a potential investor plays hardball and […]

Convertible Note Term Sheets

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 […]

How to Set Conversion Discounts in Convertible Notes

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 […]

How Convertible Debt Works

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 […]