Comments on: What is a convertible bridge note with a price cap?

By: Yokum

Yokum — Fri, 23 Jul 2010 07:33:06 +0000

@Jay – I haven't seen anyone negotiate it that way. I suppose there's some rationale for it, but I've never had anyone try to argue for a different number.

By: Jay

Jay — Wed, 21 Jul 2010 18:19:37 +0000

Hi Yokum,

Do you ever see convertible note agreements where the acquisition clause uses a price higher or lower than the conversion cap?

For example, convertible note w/ cap of $4m, but in case of acquisition the note converts at $6m valuation.

Elements of rationale:
- if acquisition happens quicky / wo/ much effort on part of investor they still receive good return on investment.
- if believe acquisition is imminent, conversion cap should be higher in 1st place.

thanks,
Jay

By: Jay

Jay — Thu, 15 Jul 2010 23:42:22 +0000

Thanks.
- Change in control clause simply specifies that investor receives the outstanding principal + unpaid accrued interest + a premium equal to the outstanding principal amount (effectively a 2x return on the investment).
- hmm – prbly could have done a priced financing, but this is already in play now

By: Yokum

Yokum — Thu, 15 Jul 2010 23:30:20 +0000

@Jay – Don't understand the question. If there is a $4.5M price cap on the Qualified Financing conversion, then I assume the change of control clause says that the investor gets the better of 2X return or what they would get if they converted at the $4.5M cap. This seems like a fair deal, although the $4.5M cap seems high. (If you could get investors to agree to a $4.5M cap, I suspect that the company is far enough along that you should just do a priced Series A financing.)

By: Jay

Jay — Thu, 15 Jul 2010 23:19:32 +0000

Hi Yokum,

Our seed-stage convertible note term sheet includes a $4.5m cap, and if we are acquired prior to financing, the investor receives a 2x return on their invested dollars (the acquisition does not result in conversion to equity). All of our investors (a mix of angels & VCs) except 1 (an angel) agreed to the term sheet as-is. The 1 investor says wo/ this acquisition conversion clause the investors will not be aligned / incented to help us get acquired. Do you agree? We understand they would be more incented w/ a higher rate of return, but a 2x return w/in 1 year is also good / standard market rate. We were also thinking that if an acquisition came to fruition, we could at that time reward our investors w/ conversion to equity or a higher return in order to provide a further reward for their assistance / investment. Any thoughts are very appreciated...

Thanks,
Jay

By: Yokum

Yokum — Tue, 01 Jun 2010 09:10:17 +0000

@Tereza – Angels would prefer a price cap as that is generally more beneficial to them than a conversion discount or warrant coverage.

By: Tereza

Tereza — Tue, 01 Jun 2010 07:52:30 +0000

Yokum — how do angels react to warrants instead of a cap?

By: jay

jay — Thu, 20 May 2010 21:48:04 +0000

Follow-up ? please on the cap:

Assume $4.5m cap on the 500k convertible debt note. Assume your example & assumptions (e.g., debt does not come out of pre-money, lesser share price of discount vs. cap).

The calcs below to determine ownership post-series A are off by 0.3% - any thoughts ? :

Seed investor = 10% (cap applied since $100m pre-money > $4.5m cap, so investor amount = 500k / 5m seed post-money valuation)

Series A investor = 33.22% ($50m / $150.5m)

Founder = 56.45% ( ($100m pre-money valuation - (10% * $150.5m)) / $150.5m )

Total = 99.7% ... appreciate any help !

By: The Curious Case of the $150M Series A « Interest In Things

The Curious Case of the $150M Series A « Interest In Things — Wed, 07 Apr 2010 20:56:46 +0000

[...] Yokum Taku's excellent Startup Company Lawyer blog, and came across a really interesting post on convertible debt financings with a price cap. Convertible debt is often the easiest way to do a seed/angel stage financing, because it avoids [...]

By: Yokum

Yokum — Mon, 22 Feb 2010 08:17:32 +0000

@Jimmy – Go hire a startup attorney to advise you.