"A senior convertible note is a debt security that contains an option in which thenotewill be converted into a predefined amount of the issuer's shares. A senior convertible note has priority over all otherdebt securitiesissued by the same organization.
Just like any other debt investment, senior convertible notes offer investors the ability to earn interest. Rather than cash payments, however, the interest payments typically will accrue and the amount the company owes the investor will increase over time.
Bothstartup companiesand well-established companies may opt to issue senior convertible notes to raise funds from investors. This type of company financing has the advantage of being fairly simple to execute. This means the process of issuing the notes is relatively inexpensive for companies and it allows them quicker access to investor funding."
Indiana Convertible Note Financing
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Multi-State
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US-ENTREP-0042-1
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How to fill out Convertible Note Financing?
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FAQ
A convertible loan note often has zero or low interest rate, or where interest does accrue it is rolled up and converted into shares along with the principal amount (i.e. capitalised interest).
Most convertible notes do accrue simple interest, often between 5 to 8% per year. The interest is usually paid at conversion. Some notes require interest payments before conversion. The interest rate and payment terms are negotiated between the startup and note holder.
Qualified Financing: This term sets the threshold amount of money that must be raised by the company through in a future equity financing in order for the principal and interest due on the note to convert into the same equity issued in that financing.
What is a convertible note? In short, a convertible note is originally structured as a debt investment but has a provision that allows the principal plus accrued interest to convert into an equity investment at a later date.
In a convertible note, the loan will convert into equity when you raise what's known as a qualified financing. A qualified financing is equity financing (not a SAFE or Convertible Note round) above a certain threshold, usually $1 million.
Yes, you can issue convertible notes for LLCs, but this approach is rare. Transferring equity to the issuer of a convertible note once the convertible note matures is more complex in such cases, and the process must be laid out in the LLC's operating agreement.
The convertible note interest rate can range from 2 to 8 percent. However, it stays most often in the 5 to 6 percent range. There are instances when the interest rate can range from 2 to 4 percent annually.
The threshold amount is typically a large number, like $500,000 or more. This is because it's unlikely one of the founders would have a relative willing to invest $500,000 to help the startup put one over on its convertible note investors.
Convertible notes are loans that accrue interest and must be repaid if they don't convert. In contrast, SAFEs do not accrue interest and usually don't need to be repaid if they don't convert. The term sheet provides a summary of major deal points.
Interest rate: The interest rate on convertible notes varies between 2% and 8%, and is normally lower than traditional loans. Maturity date: Convertible debt typically matures after 12-24 months. At this time, if the notes didn't convert into shares, the investors are repaid their note investment plus interest.
