Tue, 15 October 2019
Today, we’ll talk about the deal structure you should use for your fundraise.
There’s equity, and then there are convertible notes and SAFE notes. If you want a straight loan, then you should use a promissory note.
Equity agreements set the valuation for the company and various terms of governance, preferences, voting rights and more.
A convertible note is debt that is intended to convert to equity. A convertible note has three terms: the interest rate, discount rate, and cap rate. The interest rate is how much interest is earned while the investment is in the note form. The interest is not paid out but rather accumulated and converted to equity later. The discount rate is how many additional shares the holder will receive when it converts to equity. The convertible note holder came in early to the deal and should receive more than those who come later. Finally, there’s the cap rate which determines how the note converts to equity. The conversion will depend on the valuation set in the next round.
SAFE notes are similar to convertible notes, but often leave out one or more of the key terms. Convertible notes typically convert on a timeframe such as 3 to 5 years or on an event such as a major equity funding.
Thank you for joining us for the Startup Espresso.
Let’s go startup something today!
Direct download: Startup_Espresso_--_Deal_Structures.mp3
Category: -- posted at: 5:18pm CST