The most common area of focus. It’s like a theoretical valuation for the company. Founders will want to limit these terms and investors like the protection of both a caps and discounts. If everything goes well, it’s only the Cap that’s you will be looking at!
Normally yes. However it’s important to ensure what is included in your definition of fully diluted especially when you have multiple loans and shareholders.
Companies with multiple convertible loans need to think very carefully about conversion calculation and timing. It’s critical to understand dilution mechanics and how that impacts investors and founders.
There are tax reliefs available for investors and for the company, however it’s important to structure the convertible loan properly. We work with your accountants to ensure the legal terms reflect what’s on your balance sheet
It depends! It’s always important to consider reserved matters carefully before signing convertible loan contracts. You need to ensure your investors have a good level of protection but you also need to run your business efficiently. We can help you prepare market normal consent terms.
|Factor||Questions to ask|
|Duration||How long before maturity?|
|Interest||What rate and is it rolled up or paid out?|
|Caps/Discounts||What are the conversion economics?|
|Conversion Timing||When does the loan convert into equity? what is the definition of qualified financing?|
|Conversion Mechanics||How do you convert the loan in practical (legal) terms?|
|Control||How are decisions made/vetoed?|
|Consents and decision making||Is there a concept of majority investors? What is the decision making process? Are there any matters which require investor consent?|
|Enforceability||What is the governing law and where is your company/investors located?|
We prepare many convertible loan contracts each year. We act for founders and investors and we know the market terms for both.
To understand more about our team and recent transactions we have supported, contact us below or tweet us @whoneedslaw