Maryland 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 security is an investment that can be changed from its initial form into another form. The most common types of convertible securities are convertible bonds and convertible preferred shares, which can be converted into common stock.
6 Tips for Writing a Term Sheet List the terms. ... Summarize the terms. ... Explain the dividends. ... Include liquidation preference. ... Include voting agreement and closing items. ... Read, edit and prepare for signatures.
A term sheet is usually a non-binding agreement outlining the basic terms and conditions of the investment. It serves as a template for the convertible note for both parties. It also allows companies to design their own deals when working with investors who rely on their own standardized documents.
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.
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).
Examples of Convertible Bonds The current stock price is $25 per share. After a period of high profits and good publicity, the stock's price is now at $40 per share. The investor can take the bond and convert it into fifty shares of stock for a value of $2,000 ($40 per share times 50 shares).
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.
If a company issues a $1,000 convertible bond with 4 percent interest, that's convertible to 100 shares of stock 10 years later. Nine years later, the investor gets $1,040 if the bond isn't converted to stock: Bond amount = $1,000.