Does a convertible note holder have a choice about converting a note in an equity financing round?

Does a convertible note holder have a choice about converting a note in an equity financing round?

A convertible senior note is a debt security that accumulates interest before a maturation date. Unlike other types of debt, the owner of a convertible senior note has the option of converting the debt into equity in the company.

What is a convertible equity offering?

At its simplest, convertible equity is a form of financing that gives investors the right to preferred stock based on a specified triggering event.

When would you use a convertible note?

Conversion Provisions: The primary purpose of a convertible note is that it will convert into equity at some point in the future. The most common method of conversion occurs when a subsequent equity investment exceeds a certain threshold. This is called a qualified financing.

What is convertible notes offering?

A convertible note is a debt instrument that is convertible into shares of the issuer or another entity. They offer investors the downside protection of a debt instrument and the upside potential of an equity investment, but in return typically offer lower interest rates than straight debt instruments.

What are the primary differences between a convertible note and an equity financing round?

Generally equity financings are more expensive, although the cost of an equity financing has come down over time. Convertible notes and convertible securities like SAFEs are much cheaper (if not free) to execute given the relatively simple/short nature of the documents involved in those.

Is a convertible note a good investment?

Convertible notes avoid placing a valuation on the startup, which can be useful particularly for seed stage companies which have not had enough operating history to properly set a valuation. Convertible notes are good bridge-capital or intra-round financing options.

How do convertible notes convert to equity?

When closing a convertible note deal, investors agree to specific terms and when the next round of funding happens, the note automatically converts to equity at a discounted price (usually 20\%).

What happens to convertible notes when a startup raises capital?

Caps can be added so if the company raises more than the amount decided in the original terms, early investors get additional discounts to make up for the dilution in the deal. If your startup doesn’t seek out any additional financing during the loan term, the convertible notes may either be turned into equity or become debt that you must repay.

Do convertible notes have a valuation cap or a discount?

More often than not though, convertible notes have both a valuation cap and discount and will convert using whichever method gives the investor a lower price per share: Combining our previous examples, let’s say an issuer raises its seed round by issuing a convertible note with a $4M valuation cap and a 20\% discount.

Are convertible notes legally required to carry interest?

Convertible notes are a debt instrument and are legally required to carry interest. However, most of the time the interest will be set to zero or the lowest interest rate legally required. Convertible notes can carry higher interest rates, but it’s not the rule.