What should the interest rate for a convertible bridge note be?

April 27, 2007

Generally, the interest rate seems be somewhere between 7% to 10% per annum. Interest is typically paid at maturity. Most of the time, interest converts into preferred stock instead of being paid in cash. There are “usury” laws that limit the maximum interest rate unless an exemption is available.

California Usury Law provides that the maximum annual interest rate for non-consumer loan that may be received by a lender not exempted from its provisions is the higher of (a) 10% per annum, or (b) 5% per annum in the excess of the rate prevailing on advances by the Federal Reserve Bank of San Francisco to member banks on the 25th day of the month prior to the earlier of the (i) borrowing in question, or (ii) the date of a written commitment to make such loan.

There are certain exemptions available from California Usury Law including if (i) the indebtedness is at least $300,000 in original face amount or the indebtedness is issued pursuant to a bona fide written commitment for the lending to the issuer of at least $300,000 and the parties to the transaction meet certain other requirements, or (ii) the issuer of the indebtedness has total assets of at least $2,000,000 and the parties to the transaction meet certain other requirements.

A warrant issued in connection with the convertible bridge note or the conversion feature in the loan may render the interest rate potentially usurious unless an exemption applies.