Structuring Convertible Note Financing: Discount Rates, Valuation Caps, Conversion Triggers

Due Diligence, Determining Priority vs. Other Creditors and Equity Holders

A live 90-minute premium CLE video webinar with interactive Q&A

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Tuesday, February 1, 2022 (in 5 days)

1:00pm-2:30pm EST, 10:00am-11:30am PST

or call 1-800-926-7926

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.

Description

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.

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Outline

  1. Advantages of convertible debt as seed-stage financing
  2. What to address in the term sheet
  3. Due diligence before closing
  4. Conversion triggers
    1. Issuance of equity
    2. Sale of company or company assets
    3. Maturity
  5. Factors in determining equity value at the conversion
    1. Discount rate
    2. Valuation cap
    3. The interest rate under the note

Benefits

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?

Faculty

Goldenberg, David
David Goldenberg

Founding Attorney
VLP Law Group

Mr. Goldenberg helps growth-oriented companies on financing, M&A and general contractual matters (including JVs and...  |  Read More

Literovich, Matthew
Matthew Literovich

Attorney
Dentons

Mr. Literovich practices in the firm’s Corporate group and has significant experience in the technology, life...  |  Read More

Smith, Laurence
Laurence M. Smith

Member
Chiesa Shahinian & Giantomasi

Mr. Smith is the co-chair of the firm's Corporate and Securities Group. He has a broad-based transactional practice...  |  Read More

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