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8. Equity and Convertible Notes
The document outlines the differences between equity rounds and convertible notes in startup financing. It covers key considerations for each type, including valuation methods, types of shares, conditions for conversion, and investor expectations. Important factors such as maturity, caps, and discounts are highlighted as crucial elements in deciding between these financing options.
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8. Equity and Convertible Notes
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- 2. Agenda •Equity round •Convertible notes 2 HOWTO CHOOSE YOUR INVESTOR www.startups.be
- 3. Equity round •Investor willget equity from your company •It’s a “priced round” •Shareholder agreement •Can be longer 3 HOW TO CHOOSE YOUR INVESTOR www.startups.be
- 4. Convertible note/loan •At timeof issuing, it’s a debt •Not in your capital •No right of governance 4 HOW TO CHOOSE YOUR INVESTOR www.startups.be
- 5. When use convertiblenote •Pre-seed •Early seed •Bridge funding 5 HOW TO CHOOSE YOUR INVESTOR www.startups.be
- 6. Main points forconvertible note •Valuation CAP/Floor (Post or Pre-money) •Maturity and conversion conditions •Discount •Multiple (IRR) if early exit 6 HOW TO CHOOSE YOUR INVESTOR www.startups.be
- 7. Attention points ofa convertible note •Tax Shelter •CAP on pre or post-money and how it converts •CAP gives a valuation •Discussions about “key” problems for later, good? 7 HOW TO CHOOSE YOUR INVESTOR www.startups.be
- 8. Goals of aconvertible note •Convert in equity •Test an idea or bridge a gap •Make a quick investment (shorter legal documents) 8 HOW TO CHOOSE YOUR INVESTOR www.startups.be
- 9. « Trick » •Maturityvaluation => 1,5X/2X higher than CAP 9 HOW TO CHOOSE YOUR INVESTOR www.startups.be
- 10. Equity rounds Different typesof shares 10 HOW TO CHOOSE YOUR INVESTOR www.startups.be
- 11. Different types ofshares •Common Shares • As percentage of ownership •Non-participating • Investor wants his money back until post-money •Participating • Investor wants his money back and then pro-rata 11 HOW TO CHOOSE YOUR INVESTOR www.startups.be
- 12. Different types ofshares •Cap non-participating • Investor wants his money back until post-money and until a certain amount •Cap participating • Investor wants his money back and then pro-rata until a certain amount •Both are normaly used combined with shares without cap 12 HOW TO CHOOSE YOUR INVESTOR www.startups.be
- 13. Different types ofshares •Non-participating (X time or IRR) • Investor wants (x-time) his money back until post-money •Cap participating (X time or IRR) • Investor wants (x-time) his money back and then pro-rata •Multiple is really aggressive, IRR can but understandable but not ideal (x-time) 13 HOW TO CHOOSE YOUR INVESTOR www.startups.be
- 14. Different types ofshares •Carve-Out • Pro-rata until certain percentage of exit (15-25%) • Then participating 14 HOW TO CHOOSE YOUR INVESTOR www.startups.be
- 15. Convertibles Different types ofnotes 15 HOW TO CHOOSE YOUR INVESTOR www.startups.be
- 16. Different types ofconvertibles •Without Discount • Normal dilution for everybody, same valuation •Discount on Post-Money • POST => 1,25M€ • For note Holder => 25% discount on 1,25M€ • 50/(1,25M€*0,75) 16 HOW TO CHOOSE YOUR INVESTOR www.startups.be
- 17. Different types ofconvertibles •Discount on Pre-Money • Pre-Money =>750k€ • Convertion : 50k€/(750k€*0,75) • AVOID THAT! •CAP on Pre-Money • CAP => 500k€ • Convertion : 50k€/500k€ • Note holder was a “co-founder” => extra dilution => (50/500)*0,6 17 HOW TO CHOOSE YOUR INVESTOR www.startups.be
- 18. Different types ofconvertible (Dollar invested) •Dollar invested without • Normal dilution for everybody, same valuation •Dollar invested with discount • POST => 1,3M€ (Pre + note + Investment) • For note Holder => 25% discount on 1,3M€ • 50/(1,3M€*0,75) 18 HOW TO CHOOSE YOUR INVESTOR www.startups.be
- 19. Different types ofconvertibles (Dollar invested) •Dollar invested CAP • CAP => 1M€ • Convertion : 50k€/1M€ • No extra dilution • Post-Money : 1,3M€ 19 HOW TO CHOOSE YOUR INVESTOR www.startups.be
- 20. Different types ofconvertibles (Percentage ownership) •Percentage Ownership without dilution • Normal dilution •Percentage ownership with discount • As with discount Post-Money •Percentage ownership with CAP • CAP => 1M€ • Convertion : 50k€/1M€ • Post-Money : 1,25M€ 20 HOW TO CHOOSE YOUR INVESTOR www.startups.be
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