Structuring Convertible Note Financing: Discount Rates, Valuation Caps, Conversion Triggers
Due Diligence, Determining Priority vs. Other Creditors and Equity Holders
Course Details
- smart_display Format
On-Demand
- signal_cellular_alt Difficulty Level
- work Practice Area
Banking and Finance
- event Date
Tuesday, February 1, 2022
- schedule Time
1:00 p.m. ET./10:00 a.m. PT
- timer Program Length
90 minutes
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This 90-minute webinar is eligible in most states for 1.5 CLE credits.
This CLE course will provide founders and corporate finance counsel with guidance on structuring convertible notes for seed-stage financing. The panel will discuss upfront due diligence, term sheet negotiation, and critical terms, including the discount rate, valuation cap, and triggers for converting debt to equity.
Mr. Literovich practices in the firm’s Corporate group and has significant experience in the technology, life sciences, and charities spaces. He works extensively with emerging companies and investors as a part of the firm’s Venture Technology and Emerging Growth Companies group. Mr. Literovich advises on incorporations, shareholder matters, reorganizations, equity and debt financings, mergers and acquisitions and other corporate-commercial issues that may arise. His background in corporate strategy not only allows him to grasp a deeper understanding of clients’ businesses, but also gives clients the benefit of his sound judgment and strong negotiation skills to help them achieve their goals.
Mr. Smith is the co-chair of the firm's Corporate and Securities Group. He has a broad-based transactional practice that includes mergers and acquisitions, private equity transactions on behalf of both funds and issuers of debt and equity instruments, and syndicated, middle-market, asset-based and secondary loan transactions for commercial lenders and institutional investors.Combining his experience in M&A and commercial finance transactions, he represents lenders and investors in the purchase and sale of distressed debt. He is a frequent contributing author to legal journals and business publications, publishing articles in the areas of private equity, secured party transactions and banking law.
Mr. Goldenberg helps growth-oriented companies on financing, M&A and general contractual matters (including JVs and other business transactions) and investors in their equity investments in these companies. He excels at counseling his clients through the complex world of financing, growing and selling their business. Mr. Goldenberg also counsels individual executives on employment matters. He regularly works with company founders, investors, and related parties on preferred stock, common stock, convertible debt, down-round, bridge, warrants, and other types of financings, having completed hundreds of financing transactions in his career. Mr. Goldenberg has also overseen complex licensing transactions, strategic partnerships, helped SAAS companies create terms for their offerings, as well as worked on multiple mergers, ranging in size from $6M to $1.9B. He has authored articles on design law, copyright and the internet and regularly speaks on topics related to startups and financing.
Convertible note financing is the most common form of seed-round funding for startup companies, partly because it does not force the issuer and investors to determine the company's value at the time of the transaction. Conversion terms govern when the note converts to equity and the amount and class of equity that the noteholder will receive upon conversion.
Typically, three events might trigger a conversion: subsequent issuance of equity (often preferred) that meets an agreed minimum threshold, sale of the company or substantially all of its assets, and maturity of the note. These triggers and the options available to the noteholders must be negotiated in the term sheet and reflected in the documents.
Since valuation is not determined upfront, the parties must agree on a framework for valuing equity shares upon conversion. Critical terms include the discount rate, or valuation discount the convertible noteholder receives relative to investors in the subsequent financing round; the valuation cap, the price at which the notes will convert into equity; and the interest rate, accruing to the principal invested and increasing the number of shares issued upon conversion.
Listen as our authoritative panel analyzes the nuances and crucial negotiating points for convertible notes. The group will discuss conversion triggers, components for evaluating equity shares upon conversion, due diligence, and other terms to consider in a convertible note financing.
- Advantages of convertible debt as seed-stage financing
- What to address in the term sheet
- Due diligence before closing
- Conversion triggers
- Issuance of equity
- Sale of company or company assets
- Maturity
- Factors in determining equity value at the conversion
- Discount rate
- Valuation cap
- The interest rate under the note
The panel will review these and other key issues:
- How should an investor determine an appropriate amount of seed-stage financing to provide a startup company without an accurate valuation?
- When is the right of conversion to equity exercised?
- What is the typical discount rate, and how is the valuation cap determined at the time of the convertible note transaction?
- What is the priority of the convertible note vis-a-vis other creditors and equity holders of a startup?
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