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How to Type Convertible Note Agreement Template

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Scott from Cruise Consulting discusses a sample convertible note agreement, emphasizing the importance of using a law firm's template for documentation. He highlights key elements such as the loan amount, repayment terms, and the valuation cap, which he has covered in previous videos. Additionally, he notes the significance of the conversion terms—common versus preferred stock—indicating that institutional VCs usually prefer preferred stock. Scott encourages viewers to review the convertible note template, as it offers valuable insights into the agreement's structure and components.

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What is a typical convertible note?

A convertible note is a form of short-term debt that converts into equity, typically in conjunction with a future financing round; in effect, the investor would be loaning money to a startup and instead of a return in the form of principal plus interest, the investor would receive equity in the company.

Can an LLC issue a convertible note?

LLCs and Convertible Notes Although LLCs can use convertible notes, it is not common practice because most venture capitalists prefer to invest in a corporation. This preference is due to the following: Corporations provide equity through their shares while LLCs offer ownership interests.

What is the agreement for a convertible note?

A convertible note is a short-term debt agreement that converts into equity at a future date. Usually, this happens when one of these events takes place: The company raises enough capital to docHub a pre-determined benchmark. The term of the loan expires.

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).

What triggers a convertible note?

Convertible notes are a type of loan issued by startups that convert into equity once a triggering event occurs. Usually, the triggering event will be the startups next round of financing that exceeds an agreed-upon minimum threshold, i.e. qualified financing round.

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 a convertible note?

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 an example of a convertible note in a startup?

Heres an example: You sell $1m in convertible notes to an investor with a valuation cap of $10m, and a 30% discount rate. After 18 months, your startup gets a pre-money valuation of $20m, at $20 per share, during a Series A funding.

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Type Convertible Note Agreement Template