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

By: Yokum

Yokum — Thu, 09 Dec 2010 11:27:17 +0000

@Mike – I don't think there is an open source convertible note set of documents out there.

By: Mike

Mike — Thu, 02 Dec 2010 03:30:33 +0000

Yokum: Can you point me to a loan agreement, note or other document that contains standard provisions addressing the various components of convertible debt discussed in this very helpful post and comment thread? For example, language that defines conversion price discounts or anti-dilution protection.

thanks,

Mike

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 !