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
Ing to the convertible note term sheet, the investor will give your business cash to be repaid. However, it differs from a conventional loan because the term sheet will set out certain conditions that convert the loan from a debt obligation to shares in the company.
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.
The basic concept for valuing a convertible note is the same in theory as the valuation of any other financial asset. 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.
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.
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).
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.
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.
Convertible notes are originally structured as debt investments, but have a provision that allows the principal plus accrued interest to convert into an equity investment at a later date.