What is a conversion trigger?
Conversion Trigger means the consummation of an equity investment in the Company’s capital stock, with proceeds of at least US $10,000,000.00 (including the amount covered by a conversion of any outstanding convertible notes and debts into shares of capital stock of the Company under the aforesaid equity investment …
What are the terms of a convertible note?
Convertible notes are debt instruments that include terms like a maturity date, an interest rate, etc., but that will convert into equity if a future equity round is raised. The conversion typically occurs at a discount to the price per share of the future round.
Do convertible notes always have valuation caps?
Ultimately, whether or not a cap is included in a convertible note financing almost always comes down to who has the most leverage in the negotiation. A cap in its purest form should be protection against an unexpected run-up in valuation in the priced round and not a negotiation of current price.
What are the common triggers for convertible notes?
For a convertible note, these are the common triggers: a qualified financing, which is a term of art that means a new equity financing of a certain amount of money (including or excluding conversion of debt from, e.g., convertible notes). a financing that’s not a qualified financing.
What is an example of a conversion trigger?
Conversion Trigger: For convertibles to convert into the next equity round, terms may be included that specify that the round be of a certain size for the convertible to convert. For example, imagine a convertible note has a $5,000,000 conversion trigger.
Convertible notes give investors a right to recover their loan amount (usually with interest) or have their loan amount (and any interest) convert into shares when certain pre-agreed trigger events occur. To reward the investor, the terms of convertible notes may include a discount to the market value of a share at conversion.
Why do Startups use convertible notes to raise capital?
Using convertible notes to raise capital is attractive to startups because it can be simpler and quicker than an equity investment. It also saves the company from having to issue shares to investors, and therefore negotiate a valuation, upfront. However, convertible notes may convert into shares at some point.