The document discusses convertible debt as a financing option, characterized as a loan with equity features that allows conversion into equity under certain conditions. It outlines when to use convertible debt instead of equity, highlighting its advantages such as lower transaction costs and maintaining founder control, as well as drawbacks like conversion discounts. Additionally, it details market terms for convertible debt, including loan terms, conversion triggers, and repayment structures in various scenarios.

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Raising Money by Convertible Debt
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2. Raising Money by Convertible Debt
Topics
 What is convertible debt?
 When should I use convertible debt instead of equity?
 What are the market terms for convertible debt?
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3. What is convertible debt?
Convertible debt is a loan with equity features

Debt terms: principal, maturity, interest

Debt claim priority against assets

Principal (and sometimes accrued interest) may be
converted into equity

Conversion may be at the option of the holder or the
company, and may be subject to certain contingencies

Often convertible (sometimes at a discount) into securities
issued in first equity round raised from outside investors
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4. When should I use convertible debt
instead of equity?
 Pros
– Few variables to negotiate (so quick with low transaction costs)
– No current valuation need be set
– Maintains control by the founders
 Cons
– Not a “priced” round
– Converts at a discount in the next round
– Often includes a “cap” on conversion price into next round
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5. What are the market terms for
convertible debt?
Loan Terms
 Aggregate Amount
 Proposed Minimum Investment
 Initial Closing
 Interest Rate
 Due Date of Notes
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6. What are the market terms for
convertible debt?
Conversion upon a Qualified Financing
 Definition of a Qualified Financing
 Discount to Purchase Price
 Cap on Purchase Price
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7. What are the market terms for
convertible debt?
Conversion upon a Sale of the Company
 Definition of a Sale
 Payment to Noteholders:
– Based on conversion into Common Stock
– Fixed return (multiple of principal)
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8. What are the market terms for
convertible debt?
Conversion at Maturity
 At the Election of Company and/or Election of Noteholder(s)
 Conversion Rate
– Fixed at initial issuance of notes
– Calculated at maturity (based on fully-diluted equity outstanding)
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