Convertible Note Template For Startup
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How to fill out Convertible Note Agreement?
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FAQ
Convertible notes are good for quickly closing a Seed round. They're great for getting buy in from your first investors, especially when you have a tough time pricing your company.
Convertible notes are usually structured as a single agreement called the note purchasing agreement. This covers all of the financing terms. Promissory notes are then issued to individual investors with the date and amount of their investment.
Convertible notes provide startups with an initial round of financing, without the need to come up with a valuation for investors or a proof of profits for banks. Unlike regular debt, instead of getting repaid in principal and interest, investors receive preferred stock based on the terms set in the convertible note.
Essentially, in exchange for the money that the angels and seed-stage funds give the startup, they get a piece of paper called convertible debt. This convertible debt will allow them to make a little bit of interest while the note is outstanding. The note will typically mature in 20 to 24 months.
Here's an example: You sell $1m in convertible notes to an investor with a valuation cap of $10m, and a 30% discount rate. After 18 months, your startup gets a pre-money valuation of $20m, at $20 per share, during a Series A funding.