Structuring Convertible Note Financings: 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
Intermediate
- work Practice Area
Banking and Finance
- event Date
Tuesday, July 30, 2024
- schedule Time
1:00 p.m. ET./10:00 a.m. PT
- timer Program Length
90 minutes
-
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 note financings for seed-stage and other emerging companies. The panel will discuss customary and market terms of convertible notes, including conversion triggers and "sweeteners" such as discounts and valuation caps, as well as the documentation for such financings.
Ms. Hallsten represents emerging and established companies in a variety of practice areas, including general corporate, securities, corporate governance, private debt and equity financings, venture capital, mergers and acquisitions, and public offerings. Her client base covers many industries, including technology, health care, insurance, business services, life sciences, retail, publishing, professional services and real estate. Prior to joining the firm, Ms. Hallsten served as a staff attorney in the Division of Corporation Finance of the Securities and Exchange Commission in Washington, D.C.
Mr. Futter is the Senior Counsel to the President of Touro University. Previously he was a venture capital and technology attorney in private practice. He has been the general counsel of both a venture capital firm and a venture backed startup. Mr. Futter serves on the legal advisory board of the Angel Capital Association and previously served on the Model Forms Drafting Group of the National Venture Capital Association. Mr. Futter participated in the drafting of the Angel Capital Association's Model Convertible Promissory Note.
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.
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.
- Advantages of convertible debt financings
- Investor qualification issues
- Term (maturity) of convertible note
- Due diligence
- Attorney due diligence
- Investor due diligence
- Investor incentives (i.e., "sweeteners")
- Discount rate
- Valuation cap
- Interest rate
- Warrants
- Conversion triggers
- Subsequent equity financing
- Sale of company or company assets
- Maturity
- Documentation
- Term sheet
- Note purchase agreement
- Form of convertible note
- Investor suitability questionnaire
- Risk factors
- Side letter
- Comparison to other financing vehicles
- Simple agreements for future equity (SAFEs)
- Straight debt
The panel will review these and other key issues:
- Should notes be sold to nonaccredited investors?
- How does 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 or triggered?
- What is the typical discount rate, and how is a valuation cap determined at the time of the convertible note transaction?
- How do "sweeteners" work in a conversion triggered by a change of control?
- What is the appropriate interest rate for a convertible note?
- Why aren't warrants typically employed as a sweetener in convertible note financings?
- What is the priority of the convertible note vis-a-vis other creditors and equity holders of a startup?
- Are convertible notes always structured as unsecured obligations?
- What are the key differences between convertible notes and SAFEs?
Related Courses
Structuring Uptier and Drop-Down Financing Transactions: Crafting Loan Terms to Manage Exposure and Mitigate Risks
Thursday, May 29, 2025
1:00 p.m. ET./10:00 a.m. PT