What is an example of a convertible note?
For example, if the shares in your startup business are valued at $1 per share, a 10% discount rate would allow the investor to purchase them at 90 cents per share. Valuation cap: This places a maximum dollar amount the company can be valued for the purposes of the convertible note.
How do you structure a convertible note?
Convertible notes are usually structured as a single agreement called the note purchasing agreement. This covers all of the financing terms. Promissory notes are then issued to individual investors with the date and amount of their investment.
What is an example of convertible note terms?
EXAMPLE: A startup company with 1,000,000 shares of common stock closes a seed funding round of $1,000,000 in the form of a convertible note, with a valuation cap of $5,000,000 pre-money valuation on the next round of financing. For simplicity, assume the note carries a 0% interest rate.
What is a convertible note simple example?
A convertible note is a form of short-term debt, typically issued to investors of a company in exchange for stock at a later time. For example, it may be debt that automatically converts into shares of preferred stock upon the closing of a financing round.
What is difference between promissory note and convertible note?
Convertible notes are promissory notes that serve an additional business purpose other than merely representing debt. Convertible notes include all of the terms of a vanilla promissory note, such as an interest rate and the pledge of underlying security (if applicable).
What is an example of a convertible loan?
For example, a company needs a convertible loan for $500,000. If this loan has a warrant of 20 percent, the investor will gain a percentage of the note in addition to the original $500,000. At the start of the next round, the investor would receive $100,000 in securities (stocks, bonds, cash).
Do you need a term sheet for a convertible note?
Although it is customary to forego a term sheet, in some cases it may be required if the parties need to negotiate certain terms. It can be advantageous to use a term sheet for the company to easily summarize the terms of the notes for potential other investors purchasing a convertible note.
What is the structure of convertible debt?
With convertible debt, a business borrows money from a lender or investor where both parties enter the agreement with the intent (from the outset) to repay all (or part) of the loan by converting it into a certain number of its preferred or common shares at some point in the future.
What are convertible note repayment terms?
Standard convertible note terms are parameters for a specific form of short-term business debt. A convertible note will convert into equity at a future date, meaning that the investor loans money to an entrepreneur and receives equity in the company rather than payments on the principal plus interest.
What does a convertible note include?
A convertible notes original structure is of a debt investment. However, the instrument allows the principal and accrued interest to convert to an equity settlement in the future. Basically, convertible note investments are like debt instruments. The notes have terms on the interest rate and maturity.
