How do Convertible Notes Work? Equity Straight equity, the investors receive shares directly in the company
The Trigger Event
Convertible Notes
The trigger event triggers the conversion of the debt into equity, meaning that the convertible notes become shares and the convertible note holders become shareholders. Types of trigger events • Investment • Liquidation • Expiry date
Hybrid instrument in which debt is converted into Equity at a trigger event
Debt Investors receive a monthly payment and they are the first ones paid in case of bankruptcy
The Players THE COMPANY NEEDS MONEY TO GROW The Founders
Other Original shareholders PROFESSIONAL INVESTORS are used to convertible notes for seed or bridge funding
Convertible Notes Investors
TRIGGER EVENT VC or later stage investors
1 SET VALUATION Valuation is set at the trigger even negotiations
2 APPLY DISCOUNTS
3 GIVE EQUITY
Cap and discount are applied
Final Equity is given to convertible notes holder
The CAP
The DISCOUNT
32,5%
Average Discount Rate (Equidam)
A Cap is set to lock the maximum valuation of conversion. This protects convertible note holders in case the valuation grows too much.
The discount is set to compensate convertible note holders for the risk of investing at an earlier stage.
The Founders
Other Original sharehold ers
Convertib le Notes Investors
VC / New Investors
4 NEW INVESTORS Equity is given to Trigger Event Investors
NEW CAP TABLE IS FINALIZED
What is a convertible note: https://www.equidam.com/practical-advice-pricing-convertible-note/ Average convertible note discount: https://www.equidam.com/discount-rate-for-a-convertible-note/ Legal and financial resources for convertible notes: https://www.equidam.com/
CREDITS:
Credits for this infographic go to Daniel Faloppa and the whole team at www.equidam.com