How do Convertible Notes Work?

Equity

Debt

Convertible Notes

Straight equity, the investors receive shares directly in the company

Investors receive a monthly payment and they are the first ones paid in case of bankruptcy

Hybrid instrument in which debt is converted into Equity at a trigger event

The Trigger Event

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

The Players

The Founders Other Original shareholders

Convertible Notes Investors

PROFESSIONAL INVESTORS are used to convertible notes for seed or bridge funding

VC or later stage

investors

The  DISCOUNT   The  CAP  

The discount is set to compensate convertible note holders for the risk of investing at an earlier stage.

The Founders Convertible Notes Investors

THE COMPANY NEEDS MONEY TO GROW

TRIGGER EVENT

1 Valuation is set at the trigger even negotiations

SET  VALUATION   2 Cap and discount are applied

APPLY  DISCOUNTS   3 Final Equity is given to convertible notes holder

GIVE  EQUITY  

4 Equity is given to Trigger Event Investors

NEW  INVESTORS  

Average Discount Rate (Equidam)

32,5%

A Cap is set to lock the maximum valuation of conversion. This protects convertible note holders in case the valuation grows too much.

NEW CAP TABLE IS FINALIZED

Other Original

shareholders

VC / New Investors

CREDITS:   Credits for this infographic go to Daniel Faloppa and the whole team at www.equidam.com  

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/