Structuring Convertible Note Financings: Discount Rates, Valuation Caps, Conversion Triggers

Description

Convertible notes are a widely employed form of financing for seed-stage startup companies and for companies raising funds to "bridge" them between equity rounds, principally because the terms of notes don't require the company to determine the company's value at the time of the financing. The notes convert into equity securities of the company in accordance with the terms of the notes.

Typically, one of three events trigger conversion of a convertible note, whichever occurs first: (1) subsequent issuance by the company of equity securities (usually preferred equity) in a financing that meets a minimum threshold, (2) sale of the company or substantially all of its assets, or (3) maturity of the note. These triggers and other conversion terms are reflected in the documentation for the convertible note financing.

In order to induce prospective investors to invest in a convertible note when the valuation of the company at the time the note converts is not known when the note is purchased, "sweeteners" are typically included in the terms of the note, the most prevalent of which are discounts on the conversion price and valuation caps for conversions into a subsequent equity round. Discounts and valuation caps increase the number of shares issued upon conversion of the note.

Listen as our authoritative panel analyzes the nuances and crucial structuring points for convertible note financings. The panelists will discuss conversion triggers, conversion discounts and valuation caps, documentation for a convertible note financing, alternatives to a convertible note financing, and other significant terms to consider when advising early stage companies in structuring a convertible note financing.