Illinois Term Sheet — Convertible Debt Financing is a legal document that outlines the terms and conditions of a loan agreement between a lender and a borrower in the state of Illinois, specifically pertaining to convertible debt financing. It provides a detailed framework for the loan structure, repayment terms, interest rates, conversion mechanics, and other essential provisions. The term sheet serves as a critical precursor to the final agreement and acts as a guide for both parties involved in the transaction. It lays out the key points of negotiation and acts as a reference point for future discussions and documentation. Convertible debt financing is a unique form of financing that combines debt and equity elements. It allows the lender to convert the outstanding debt into equity in the borrower's company at a later predetermined date. This type of financing is commonly used by startup companies or businesses with uncertain valuations, providing flexibility for both parties. Some different types of Illinois Term Sheet — Convertible Debt Financing that may exist include: 1. Convertible Note Term Sheet: This type of term sheet outlines the terms and conditions specific to a convertible note, which is a debt instrument that can be converted into equity shares of the borrowing company. 2. SAFE (Simple Agreement for Future Equity) Term Sheet: SAFE term sheets detail the terms and conditions of convertible debt financing using the SAFE instrument. SAFE is an increasingly popular alternative to convertible notes, offering simplicity and standardized terms. 3. Venture Debt Term Sheet: Venture debt refers to debt financing provided to startups and high-growth companies. A venture debt term sheet outlines the specific terms and conditions of this type of debt, including repayment schedules, interest rates, and potential conversion mechanisms. 4. Bridge Loan Term Sheet: A bridge loan is a short-term financing option that provides immediate funding while the borrower secures a long-term loan or another source of capital. The bridge loan term sheet would outline the terms associated with the bridge financing, including maturity date, interest rates, and potential conversion provisions. 5. Mezzanine Financing Term Sheet: Mezzanine financing refers to a hybrid form of financing that combines elements of debt and equity. Mezzanine financing term sheets specify the terms and conditions associated with this type of financing, such as the interest rates, repayment terms, and conversion mechanics. It is important to note that each of these term sheets may vary depending on the specific requirements and preferences of the lender, borrower, and the unique characteristics of the financing arrangement. The term sheet serves as a starting point for negotiations and ensures that both parties have a comprehensive understanding of the terms before proceeding with the final loan agreement.
Illinois Term Sheet - Convertible Debt Financing
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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).
Although it is customary to forego a term sheet, in some cases it may be required if the parties need to negotiate certain terms. It can be advantageous to use a term sheet for the company to easily summarize the terms of the notes for potential other investors purchasing a convertible note.
Convertible debt issued at a substantial premium could result in the instrument being treated entirely as an equity instrument for tax purposes, with no tax consequences during its term or upon redemption.
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).
Typically, the result is that the amount will convert to shares. If the convertible notes convert into shares, the company will need to determine how many shares to issue to the noteholder. To do so, the company will usually divide the loan amount, plus any accrued interest, by a certain share price.
For tax purposes, the tax basis of the convertible debt is the entire proceeds received at issuance of the debt. Thus, the book and tax bases of the convertible debt are different. ASC 740-10-55-51 addresses whether a deferred tax liability should be recognized for that basis difference.
Conversion to Equity - Accounting for Convertible Debt When the note converts, usually during a new funding round, the liability moves to the equity section of the balance sheet. At this stage, the convertible note is settled, and new equity instruments, typically preferred shares, are issued to the investor.
The convertible debt that was listed as a non-current liability before the conversion now gets get treated as shareholder's equity.