Note conversion upon equity investments

The preferred dividends are generally not paid in cash, but accrued and paid out when there is a liquidity event. It is not intended to provide professional advice. At its core, a SAFE is a warrant to purchase stock in a future priced round. View all results. Are you a client who needs support?

The Basics

Central Bank indexed promissory notes in USD, debt conversion securities, Certificates of deposit arising from portfolio swaps. Debt — For other uses, see Debt disambiguation. Equity value — is a note conversion upon equity investments based measure of the equity value of a firm. Conversion law — For other uses of the word conversionsee Conversion. Conversion is a common law tort. A conversion is a conversoin act by one person inconsistent with the ownership rights of .

How can startup founders decide between SAFE and convertible notes?

The vast majority of high-growth startup companies rely on some form of outside financings such as funding from angel funds, traditional venture capital, high net worth investors, or friends and family. While identifying a viable market and making a great pitch are crucial to raising investment funding, there is a seemingly endless array of other considerations that need to be addressed before those funds show up in your bank account and you are off and running to create the next big thing. In this article, I am going to look at one of those major decisions that most entrepreneurs and companies must face when they are raising investment funds and that is the pros and cons of using convertible notes to finance your company. Convertible notes have become increasingly popular in the world of startup financing, particularly in seed stage companies. However, before going down this path, it is important to understand the potential pitfalls of this type of financing and whether or not it is the best choice for your company. I will first give a brief overview of the basic concept of a convertible note and how it has some attributes of both debt and equity, and then I will look at the pros and cons of this form of financing.

Executive Summary

Since that is the last thing an entrepreneur would like to deal with, the obvious choice from this perspective is the SAFE. Finance All Blogs Icon Chevron. However, as TechCrunch points out, this type of debt automatically converts into shares of preferred stock upon the closing of a Series A round of financing. Cover image courtesy of Tatters via Flickr. Assuming the company can make the payments, the investor knows what return they are getting in advance. Since you are lending money to a company, convertible notes will more often than not accrue interest as. The Pros of Convertible Notes Convertible note financings are simpler to document from a legal perspective, meaning that they are less expensive and quicker to execute. Paid after debt satisfied in full, and receives return of capital and accrued dividends if preferred equity plus share of remaining proceeds. When most people think of an investment, they are thinking about equity. Talk to an Expert. The most common method of conversion occurs when a subsequent equity investment exceeds a certain threshold.