Entrepreneurs raising money often utilize a legal document called a convertible note. A convertible note is a debt instrument that is convertible into equity (usually preferred stock) in a company typically upon a triggering event such as a future qualified fundraising. If the loan is not converted into equity pursuant to designated triggering event(s) before a set maturity date, it usually must be repaid with interest; or the parties need to negotiate an extension or conversion at maturity. NEXT attorneys, as seasoned Convertible Note lawyers, have represented founders using a Convertible Note in a multitude of transactions.
Elements of a Convertible Note
In some cases, an early stage founder will seek to raise seed capital via friends and family and/or through angel investors. Because the company is in its infancy, it is difficult to ascertain the valuation of the company. As such, the convertible note document avoids setting a valuation of the company at the early stage and provides that, upon a future event, the investor’s convertible note will convert to equity at a discount to the next priced equity financing (usually a preferred stock round), or at an agreed upon maximum “Valuation Cap”. The founder and investor will also negotiate an interest rate, a maturity date, how the note converts to equity during a qualified and non-qualified financing, and what happens if the company is sold or reaches the maturity date prior to completing a financing. This structure provides benefits to both the founders and the investors.
Fixed Fee Convertible Note Package
We have drawn from our experience as Convertible Note lawyers to develop a comprehensive fixed fee Convertible Note Packages, which includes:
- Strategic guidance on the financing process
- A review of prior corporate documents for existing investor rights
- Preparation and negotiation of the Term Sheet
- Preparation and negotiation of Convertible Note Purchase Agreement and Convertible Notes
- Preparation of Corporate Resolutions
- Preparation of Accredited Investor Questionnaire
- Management of the Closing
- Federal Level – SEC – Securities Filings
- State Level Securities Filings