North Carolina 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).
A primary disadvantage of convertible bonds is their liquidity risk. In theory, when a stock declines, the associated convertible bond will decline less, because it is protected by its value as a fixed-income instrument. However, CBs can decline in value more than stocks due to their liquidity risk.
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.
A venture capital (VC) term sheet is a statement of the proposed terms and conditions for a proposed investment. Most of the terms are non-binding, except for certain confidentiality and exclusivity rights. Founders who receive a term sheet need to understand, from a legal perspective, how to manage the process.
Share. Convertible debt definition. With convertible debt, a business borrows money from a lender or investor where both parties enter the agreement with the intent (from the outset) to repay all (or part) of the loan by converting it into a certain number of its preferred or common shares at some point in the future.
At its most basic, convertible debt is a loan ? an investor gives your startup money to build the business. But unlike bank loans and credit cards, you don't pay back the loan with more money.
Advantages of convertible notes Allow for fundraising before company valuation. Founders don't have to give up equity at early stages. Compared to equity, they're safer for investors because they're debt instruments.
Terms of Convertible Debt The interest rate. Usually somewhere between 4% and 8%. The maturity date. Usually 12?24 months. A mandatory conversion paragraph. ... An optional conversion paragraph. ... A change of control provision. ... A conversion discount. ... A valuation cap. ... An amendment provision.
Convertible bonds offer lower interest rates than comparable conventional bonds, so they're a cost-effective way for the company to raise money. Their conversion to shares also saves the company cash, although it risks diluting the share price.
Typical terms of convertible notes are: interest rate, maturity date, conversion provisions, a conversion discount, and a valuation cap.