Louisiana Term Sheet - Convertible Debt Financing
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How to fill out Term Sheet - Convertible Debt Financing?
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FAQ
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).
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.
Copyright PURE Asset Management 2022. A convertible note, also called a hybrid security or hybrid, refers to a debt instrument that can be converted into equity (ownership in a company) at some point in time in the future.
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).
Convertible notes are recorded as debt on the company's balance sheet up until the conversion event. After conversion, they become equity in the company. As debt instruments, convertible notes also have a maturity date and can earn interest (two key differences with SAFEs, as outlined further down).
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.
Are SAFE Notes Debt? No, SAFEs should not be accounted for as debt but instead as equity. Experienced venture capitalists expect to see SAFE notes in the equity section of a company's balance sheet - therefore, they should be classified as equity, not debt.
A venture capital term sheet is the blueprint for an investment. Although term sheets have a set of formalized components, terms are generally undefined. The parties involved may have different understandings of what the terms mean.