District of Columbia Term Sheet - Convertible Debt Financing
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How to fill out Term Sheet - Convertible Debt Financing?
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FAQ
Example of convertible debt ABC Company raises $1,000,000 in convertible debt financing from an investor with the following conversion privileges and a callable option: Conversion privileges?The loan can be converted into 20,000 common shares in ABC Company at $50 per share within 3 years.
A convertible note should be classified as a Long Term Liability that then converts to Equity as stipulated from the contract (usually a new fundraising round).
EXAMPLE: A startup company with 1,000,000 shares of common stock closes a seed funding round of $1,000,000 in the form of a convertible note, with a valuation cap of $5,000,000 pre-money valuation on the next round of financing.
Convertible debt is a debt hybrid product with an embedded option that allows the holder to convert the debt into equity in the future. The ratio is calculated by dividing the convertible security's par value by the conversion price of equity.
The basic concept for valuing a convertible note is the same in theory as the valuation of any other financial asset. The value of the note is equal to the present value of the future income that the convertible note will receive, discounted to the present value based on its associated risk.
Convertible Notes are loans ? so they are recorded on the Balance Sheet of a company as a liability when they are made. Depending on the debt's maturity date, they can either be shown as a current liability (loans maturing within 12 months) or as a Long-term liability (loans maturing over 12 months).
The conversion value will be estimated ing to the ?with and without? method by subtracting the straight debt fair value from the aggregate fair value of the convertible note.
The conversion price of the convertible security is the price of the bond divided by the conversion ratio. If the bonds par value is $1000, the conversion price is calculated by dividing $1000 by 5, or $200. If the conversion ratio is 10, the conversion price drops to $100.