Tcn convertible debt-bl 2014

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Tcn convertible debt-bl 2014

  1. 1. @TCNupdate #tcnLIVE Bob Bishop, Goodwin Procter LLP & Founders Workbench @BostonBishop Ben Littauer, Boston Harbor Angels & Walnut Venture Associates @LittWeb Olivia Dufour, NTT Data @Olivia_Dufour
  2. 2. Convertible Debt Ben Littauer: viz.me/littauer @TCNupdate #tcnLIVE
  3. 3. Review  of  an  Equity  Deal   3   •  Company  and  Investors  agree  on  a  “pre-­‐money   valua=on”  (PM)  which  leads  to  a  price  per  share   •  Investors  put  in  $X   •  Investors  then  own:  X  /  (X  +  PM)  of  the  company   Example:   PM  =  $1M   X  =  $0.5M   Investors  own  0.5/1.5  =  33%     Remember:  New  issuance  NOT  transfer  of   shares   @TCNupdate #tcnLIVE
  4. 4. What  is  Conver=ble  Debt   4   •  Many  seed-­‐stage  companies  use  an  instrument   called  Conver=ble  Debt.   •  Conver=ble  debt  is  not  tradi=onal  bank  debt   •  Converts  exist  for  several  reasons   – Investors  and  Entrepreneurs  find  it  hard  to  agree  on  a   PM  valua=on   – Some=mes  quicker  and  cheaper  to  document  than   equity  deals     – May  allow  for  “rolling  close”  accre=on  of  investment   @TCNupdate #tcnLIVE
  5. 5. Basic  Structure  of  Conver=ble  Debt   5   •  Investor  loans  $  to  Company  an#cipa#ng  another   round  of  funding,  usually  triggered  by  the  size  of   the  next  raise   •  Investment  accrues  small  interest  (6-­‐8%  typical)   •  Debt  is  usually  unsecured  and  inferior  to  most   other  debt   •  When  the  funding  occurs,  investment  +  interest   convert  to  equity  on  same  terms  as  new  money,   usually  at  a  discount  (15-­‐25%  typical)  and  subject   to  a  maximum  valua=on  (cap)   @TCNupdate #tcnLIVE
  6. 6. Structure  of  Conver=ble  Debt  Ex1   6   Example:   •  Investors  loan  $200K  to  Company     •  20%  discount;  $2M  cap   •  As  of  conversion,  interest  of  $10k  has  accrued   •  Next  Round  PM  =  $2m;  1M  shares  before  financing   •  New  Shares  offered  at  $2/each     At  Conversion,  Noteholders  receive  210K  /  1.60  shares   =  131,250  shares   @TCNupdate #tcnLIVE
  7. 7. Structure  of  Conver=ble  Debt  Ex2   7   Example:   •  Investors  loan  $200K  to  Company     •  20%  discount;  $2M  cap   •  As  of  conversion,  interest  of  $10k  has  accrued   •  Next  Round  PM  =  $4m;  1M  shares  before  financing   •  New  Shares  offered  at  $4/each;  share  price  at  $2M   pre  would  have  been  $2/each     At  Conversion,  Noteholders  receive  210K  /  2  shares  =   105,000  shares   Without  cap  would  be  210K  /  3.2  =  65,625  shares   @TCNupdate #tcnLIVE
  8. 8. Converts–  Complica=ons!   8   •  What  if  only  a  lihle  money  comes  in?   •  When  does  the  debt  convert?   •  What  happens  if  PM  of  next  round  is  huge?   •  Does  the  investor  have  any  say  in  things?   •  What  if  there  is  an  equity  investment  that  doesn’t   trigger  conversion?   •  What  happens  if  it  never  converts?   •  What  happens  if  Company  gets  bought?   @TCNupdate #tcnLIVE
  9. 9. Converts–  Solu=ons?   9   •  Caps  and  Floors   •  Default  conversion  price  and  security  at  maturity   •  Open  round,  minimum  close   •  Quick  sale  preferences  (ex.  2x)   •  Governance  provisions   •  Careful  ahen=on  to  conversion  condi=ons   Typical  legal  documents  are  a  Promissory  Note,  a  Note   Purchase  Agreement,  and  (for  exis=ng  shareholders),  a   Shareholder  Agreement  that  codifies  other  condi=ons   of  the  note  (e.g  crea=on  of  board).   @TCNupdate #tcnLIVE
  10. 10. Converts:  When  Do  They  Work?   10   •  “Bridge”  financing  in  an=cipa=on  of  an  “event”   – Another  financing   – A  big  sale   – Company  sale   •  Seed  stage  investment   – Valua=on  not  understood   – Rolling  closes  (ooen  with  ratche=ng  caps)   – Proof  points  as  an  “event”   – When  the  investor  loves  the  company  (cf.  exuberant   equity  valua=ons)   @TCNupdate #tcnLIVE
  11. 11. @TCNupdate #tcnLIVE Bob Bishop, Goodwin Procter LLP & Founders Workbench @BostonBishop Ben Littauer, Boston Harbor Angels & Walnut Venture Associates @LittWeb Olivia Dufour, NTT Data @Olivia_Dufour

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