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
While most startups and investors focus on convertible note terms like the discount and price cap, one important but overlooked term is convertible note interest. Since a convertible note is in fact a debt interest, it follows that the convertible note investment should accrue interest. However, startups should be mindful
In most equity financing rounds, an investor will ask for (and get) a term called a liquidation preference. A liquidation preference is the amount that must be paid to a preferred stock holder before any sale proceeds may be paid to the holders of common stock (i.e., founders, option holders,
Here’s a list of the top 5 worst seed round terms that cause harm to startups at the seed financing stage and therefore should be avoided: 5. Control “Control” of a startup can manifest itself in various forms such as equal (or investor-favorable) representation on the board of directors or
I’ve done quite a few recent seed deals using various ‘standard’ seed financing docs (Series Seed, TechStars Series AA, etc.). While using these document sets can help reduce transaction costs and the time to close, a startup can run into trouble by trusting deal documents without verification. For example, a
I hate non-dilution rights and if you are an entrepreneur you should, too. I’m not talking about price-based anti-dilution protection that is typical in an angel or VC round. What I’m referring to is a right given to a particular stockholder so that such stockholder’s equity in the company is
Whenever a startup considers paying a “finder” for successful investor introductions, I have the same type of conversation with the founders that goes something like this: — Startup: “Finder” knows a lot of investors and he’ll introduce us if we pay him [6]% of all capital raised through the introductions.
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
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
The Dodd-Frank Wall Street Reform and Consumer Protection Act probably won’t fix or prevent anything, but it was successful at modifying a portion of the definition of an accredited investor. Official Language in the Dodd-Frank Act: ———- SEC. 413. ADJUSTING THE ACCREDITED INVESTOR STANDARD. (a) IN GENERAL.—The Commission shall adjust
