What does convertible loan means?
A convertible loan allows an investor to convert a loan it has made to the company into equity, that means shares in the company on pre-agreed terms and usually, but not always, at a discount.
What does a term sheet include?
All term sheets contain information on the assets, initial purchase price including any contingencies that may affect the price, a timeframe for a response, and other salient information. Term sheets are most often associated with startups.
What are typical convertible note terms?
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 you need a term sheet for a convertible note?
Although it is customary to forego a term sheet, in some cases it may be required if the parties need to negotiate certain terms. It can be advantageous to use a term sheet for the company to easily summarize the terms of the notes for potential other investors purchasing a convertible note.
Is convertible debt considered equity?
A convertible is a bond, preferred share, or another financial instrument that can be converted by the shareholder into common stock. Convertible securities are not classified as debt or equity; instead, they are considered to be a hybrid of the two categories, possessing cash flow features of both bonds and stocks.
What is the purpose of convertible debt?
Companies issue convertible bonds to lower the coupon rate on debt and to delay dilution. A bond’s conversion ratio determines how many shares an investor will get for it. Companies can force conversion of the bonds if the stock price is higher than if the bond were to be redeemed.
How does a convertible loan agreement work?
A convertible note is a form of short-term debt that converts into equity, typically in conjunction with a future financing round; in effect, the investor would be loaning money to a startup and instead of a return in the form of principal plus interest, the investor would receive equity in the company.
What is the difference between a term sheet and a contract?
There is no substantial difference between a term sheet and heads of agreement. The terminology can often be used interchangeably. This document is also sometimes called a memorandum of understanding.
What happens after a term sheet?
Post-term sheet diligence (aka confirmatory diligence) consists generally of “check the box” style inquiries on both the business and legal side. Confirmatory business diligence may involve things like customer calls, deeper dives into particular key metrics and follow up questions on your operating plan and models.
Is convertible note debt or equity?
A convertible note is a short-term debt that eventually converts into equity. Convertible notes operate as loans and are typically issued in conjunction with future financing rounds.
How are convertible notes calculated?
In order to calculate the valuation cap adjusted price per share for convertible note holders, you would divide the valuation cap on the note by the pre-money valuation of the subsequent round and apply that to the Series A price per share.
How to read a convertible debt term sheet?
Interest: Since a convertible note is a type of loan, it accrues interest until it converts. Interest may be paid out to investors upon conversion, may be put aside to be paid on exit, or may convert into equity. Conversion to Equity: Defines what triggers the convertible note to transfer into equity and under what structure. The term will highlight what is the minimum amount that will need to be raised in the next round in order to automatically trigger conversion into equity.
What are typical convertible debt note terms?
Qualified Financing. In most cases an equity financing will not trigger an automatic conversion unless a minimum amount of new cash is raised in the financing.
What is a term sheet for a loan?
Date
What is a convertible loan?
Definition of the terms: Discount Rate — establishes how much an investor is compensated for the additional risk he or she takes by investing in a company early on.