... “Term sheet for a convertible note” templates. Numerical example: $25k convertible note with 10% warrant coverage. Cap Table Template A capitalization table, or “cap table” for short, is a list of a company’s securities (common stock, preferred stock, options, warrants, etc.) A convertible note is a combination of debt and equity that helps a startup raise needed capital while still being able to delay valuing the company. In the example above, you can see that $500K of convertible notes winds up with ~$1.3MM in preferences and ~7.3% ownership because of the $4MM cap. Pre-Money Cap Table with Convertible Note • Company issues $1M Convertible Note –Conversion Discount 30% –Valuation Cap $5M $ Shares Ownership % Senior Notes $1,000,000 Founders $ 100,000 1,000,000 100% Total $1,100,000 1,000,000 100% 7 Neil R. Milano 8. So we use the Conversion Cap valuation of $4M to convert. Drafting Note to Convertible Note Financing: This is a formal term sheet for a convertible note issuance in connection with a seed-stage financing. You can also calculate equity using the valuation cap. CODES (8 days ago) Valuation caps on convertible notes, explained with graphs . One of the most difficult tasks for a startup founder is toraise funds, more so in the early stages of the operations. This unless the valuation is above the cap. With little data to base on, the startup cannot be truly evaluated for its worth, shares cannot be issued, and it … This protects the investor against receiving only a minuscule amount of ownership in the company because the valuation of the future priced equity round gets set so high. A convertible note cap sets the maximum valuation at which the investment made via the convertible note can convert into equity. Otherwise, at a predefined deadline or maturity date often 18 or 24 months after the original investment. 2. Some convertible notes don’t have a cap at all, which means the sky is the limit on future valuation when the note converts. The purpose of the discount rate and/or valuation cap is to reward the convertible note holder with a lower share price as compensation for taking on additional risk, compared to the later stage funders, by … The legal fees will be virtually identical. But since we call it convertible, it means that it converts to equity at some point in the future, when an equity-based funding round or another event like an exit happens. NOTE: To issue convertibles in Carta the Form of Convertible is required, the Purchase agreement is optional. This form also assumes that the borrower is a Delaware corporation. Integrated checklist helps you keep track of the status of each investor, including whether you’ve received their … A convertible note is a type of financial instrument, which allows companies to define the terms for seed round investments, and investments at later stages. The KISS convertible note is a short and sweet “open source” document that was drafted after discussions with many Silicon Valley law firms and early-stage investors. To calculate how much the Series-A VC has, you divide $2m/$10m (investment over the post-money), implying 20% ownership post financing. Supports convertible notes, pre-money and post-money SAFEs. Convertible Note Subscription Agreement: This document is a contract for an investor to subscribe for a convertible note. In this case, that valuation is the series-A (qualified financing). We've helped clients save thousands of dollars in legal fees by leveraging technology to create the most efficient process possible. These documents are intended only for US companies. It effectively caps the price at which your notes will convert into equity and – in a way – provides convertible note holders with equity-like upside if the company takes off out of the gate. Numerical Example: $25k convertible note with $5M cap, 20% discount. A. Let’s do numerical example ignoring any accrued interest: You invest $25k in a startup’s seed round using a convertible note with a $5M cap, 20% discount. 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. Works for equity rounds, convertible notes, SAFEs, warrants, equity grants, options, and more, across multiple rounds of investments at different valuations, and shows how the distribution of value and ownership changes over multiple rounds. The note has a discount rate of 30% and a cap of $8m. A convertible note is a short-term debt that has an interest or discount rate, a valuation cap, and a maturity date. $50,000 + interest if a convertible note: Your Conversion Price: $.3596: Financing Price: $.5412 Your Shares: 139,043 Your Share Class: Preferred Series A Your Post-financing Ownership.27% Your Share Price Calculation: Numerator = 4,000,000 (your cap) Denominator = 11,000,000 (fully diluted pre-money shares) + 123,444 (new options to be allocated) What is warrant coverage in a convertible note? Series Seed deals can be simple to document, do … 1 The typical type of interest for a Convertible Note is Simple. Created by Equidam and free for everybody to use. Transfer of Shares (Secondary Sales): The template allows to account for transfers, keeping the cap … A convertible note is a type of short term debt that converts into equity. Our platform streamlines the process of drafting convertible notes. In this case, convertible note holders will receive the same equity stake, thus ideally benefitting from a higher valuation, as their shares will be worth more. $50,000 + interest if a convertible note: Your Conversion Price: $.3596: Financing Price: $.5412 Your Shares: 139,043 Your Share Class: Preferred Series A Your Post-financing Ownership.27% Your Share Price Calculation: Numerator = 4,000,000 (your cap) Denominator = 11,000,000 (fully diluted pre-money shares) + 123,444 (new options to be allocated) Example 2: a VC invests $2.5M on a pre-money valuation of $4M. Y Combinator introduced the safe (simple agreement for future equity) in late 2013, and since then, it has been used by almost all YC startups and countless non-YC startups as the main instrument for early-stage fundraising. That said, here is the one that we’d recommend as the most commonly-referenced in the industry: COOLEYGO: Series Seed Convertible Note Financing Package template; Other financing options If, at the Series A, the startup raises money from a venture capital firm that invests at a pre-money valuation of $10M with a per share price of $5.00 IF we apply the discount, the … Prior to conversion, convertible note investors do not actually own stock or have voting rights. Continuing from our pre-investment cap table example, our startup currently has two founders, three employees, an option pool, and no investment.Well, let’s change that last statement. Who gets diluted? Companies are able to raise funds at a relatively low cost by deferring the negotiation and complexity of a priced round until a later time. Enter the amount, discount, and cap for the convertible note. The Investors in the Convertible Debt round get 100,000 * ($500k / $4M) = 12,500 shares. Typical terms of convertible notes are: interest rate, maturity date, conversion provisions, a conversion discount, and a valuation cap. The process of a seed-stage financing does not necessarily include a formal term sheet. Some people recommend convertible notes instead of SAFE notes and believe that SAFE notes are not as simple or inexpensive as they appear. It also allows companies to design their own deals when working with investors who rely on their own standardized documents. There are vetted and widely accepted templates for this type of financing: SAFE, KISS, and techstars. If you didn’t have a cap, you would simply give a fixed (say 20%) discount when the note converts into shares. Created by Equidam and free for everybody to use. The date is July 1, 2016, and we successfully received a total investment of $150,000 ($100,000 investment from Angel Investor #1 and $50,000 from Angel #2) in the form of a convertible note. For example, if an investor invests €100,000 through a convertible with a cap of €1,000,000, the ratio plotted below would be 10%. If you find this sheet valuable, please leave a comment. promissory notes (the “Transaction Notes”) being executed and delivered in connection with and as a part of a convertible debt offering (the “Debt Offering”) being conducted by Borrower. Convertible notes are the preferred instrument for early stage investments under $1 million. Enter the Convertible Note Details. If a client asks me whether they should take a low-interest capped convertible note with a 3-yr maturity v. a capped Post-Money SAFE for their first seed raise, my answer will be the convertible note. I recently dealt with a tense situation regarding the "Qualified Financing" trigger in a standard convertible note financing. What is warrant coverage in a convertible note? The amount of the convertible note should include any accrued interest accumulated on the loan note since it was issued. Convertible Note Cap And Discount. Numerical example: $25k convertible note with 10% warrant coverage. The series-a price per share is $8m (the pre-money valuation) divided by 1m (founder shares). Learn how to read a cap table and manage it with a free cap table excel template to manage and track the capitalisation of your company. In our first scenario – where the company is raising at a $12M pre-money … It serves as a template for the convertible note for both parties. Numerical Example: $25k convertible note with $5M cap, 20% discount. Model priced funding rounds with convertible securities to understand founder dilution in LTSE Equity. Clerky, Inc. is not an attorney or a law firm, and can only provide self-help services at your specific direction. However, we can look at the ratio of the convertible note’s amount to the cap. This problem really boils down to who gets diluted and how much the company is worth. Convertible notes help founders and investors sidestep the friction of agreeing on a valuation for the startup. At this point, the business idea has just started gathering momentum and will take some time to expand into viable operations. Startups that are super hot and have a lot of demand for their investment round might be able to get away with this. In short, to keep convertible equity financings simple and quick, 500Startups created the KISS note template. No lengthy negotiations are needed; no new sh… ... lower of an agreed cap upon the company prior to the new financing (i.e., a valuation cap) and a discount to Click here to open the Series Seed Convertible Note Financing Documents Generator. When thinking about the pros and cons of convertible notes it is convenient to understand a few of the most important ones. 3 The typical range of discounts that we see is 10-30%. 2 The typical interest rate for a Convertible Note is 8.0 – 12.0%. Convertible note templates. If you hadn’t raised a convertible note, then math is simple. Cap divided by the capitalization of the Company, on a fully-diluted, as-converted basis, immediately prior to such Qualified Financing or Non-Qualified Financing. The Notes will be issued and sold pursuant to a convertible note purchase agreement prepared by the Company’s legal counsel (the “Note Purchase Agreement”). Convertible notes are an easy way for your startup to raise capital without having to create value for the shares. A convertible note is a loan from the investor to the company. 3 The typical range of discounts that we see is 10-30%. Convertible notes made easy. Simply, convertible notes and SAFEs are agreements between a company and an investor to exchange shares tomorrow for cash today. The convertible note is often used to defer conversation about this valuation to the series-A where a VC sets the valuation. and who owns those securities. Pre-money vs post-money conversion is a detail not always included in the terms of a note agreement, yet it can make a massive difference to the outcome of a new round of financing. The valuation cap is an additional reward for bearing risk earlier on. One of the benefits of convertible notes is … Developed in collaboration with Y Combinator. What Is a Convertible Note? As one of the main “points” of doing a convertible note was to not fix a valuation in the first place, and with a cap you basically have set a valuation, go with a “Series Seed” equity deal instead. Convertible notes are simple documents that include any agreed interest rate, valuation cap, maturity date, and other provisions. 1 The typical type of interest for a Convertible Note is Simple. For example, there could be an instance in which after the SAFE note is signed and a valuation cap discount is arranged, another investor offers a larger cap and requests that the SAFEs convert to a higher cap. The valuation cap is an additional reward for bearing risk earlier on. Convertible Notes Overview . Upload default or template documents to attach for each convertible as they are individually drafted. Investors use convertible notes to invest in startups in the early stages of development. Tl;dr: FREE cap table example! Who gets diluted? There are a few convertible note templates available for founders who are interested in raising this type of financing. A Convertible Note is a short-term debt instrument that converts into equity and widely used by startups to collect funding. The Conversion Price can be based on a discounted amount and/or a valuation cap.. As a general rule, the shorter the term of the Notes and the less risky the investment, the lower the expected discount. The Pros of Convertible Notes. This Practice Note explains the main features of convertible notes and the simple agreement for future equity (SAFE) used in seed financings. A convertible note created under a Convertible Note Subscription Agreement is interest-bearing, has a maturity date, and specifies a minimum amount of funds to be raised at the equity financing. A quick and easy convertible note calculator with the average and most used discounts. This value triggers the cap. For background, convertible debt documents typically provide that the debt will automatically convert into a future0 Qualified Financing equity round. Clerky, Inc. is a bonded legal document assistant registered in Alameda County, California (#165, expiring February 27, 2022). Convertible note denominated in a foreign currency 13 Variable conversion price limited to ‘cap’ and/or a ‘floor’ 13 Scenarios where the conversion feature still meets equity classification 14 ‘Loyalty bonus’ issues 14 Adjustments from a stock split or bonus issue 14 All together: An uncapped convertible note with an MFN clause Putting it together, these notes are the most flexible terms you can possibly have. Convertible notes allow you to raise funding without expending effort on a priced round. A convertible note also usually includes a “valuation cap” — a maximum valuation at which the investment made via the convertible note will convert into equity. A cap on a convertible note sets a maximum company valuation that the convertible note can convert into equity. Investors of a convertible note usually get converted at the lesser of the valuation of the next qualified funding round and the cap. Some people recommend convertible notes instead of SAFE notes and believe that SAFE notes are not as simple or inexpensive as they appear. This KISS note template has been created to be flexible without being overly customizable. ... “Term sheet for a convertible note” templates. The scenario setup for convertible note terms Seed round. The most important distinction is whether the template is an equity or debt convertible financing. We’ve built on that to include additional features and integrated it with our online signing process, cap table, share certificates and more, and called it a SeedFAST. Here are a few reasons: 1. Determines how many shares the convertible note investor receives for the Purchase Amount. Some investors place special demands on convertible notes to address the inherent problems with valuation in young startups, such as placing a conversion value cap on the transaction. Ultimate startup cap table example and return analysis template (UPDATED!) A Cap sets the maximum company valuation at which the investment made via the convertible loan can convert into equity. A convertible note for $500,000 would translate to 6,250 shares at the discounted rate of $80 per share. Enter the amount, discount, and cap for the convertible note. Both Priced Rounds and Convertible Notes: Many startups raise through convertible notes so we included it (with conversions in line with YC SAFE and 500 KISS template). In short, to keep convertible equity financings simple and quick, 500Startups created the KISS note template. Numerical Example: $25k convertible note with no cap, 20% discount. Learn more about the Series Seed project and our contributions in our introductory post.. Current version: 1.0 (June 20, 2017 – RELEASE NOTES) Pre-money vs post-money conversion is a detail not always included in the terms of a note agreement, yet it can make a massive difference to the outcome of a new round of financing. 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