North Carolina Convertible Note Subscription Agreement
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How to fill out Convertible Note Subscription Agreement?
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FAQ
Discount rate on convertible debt conversion Conversion discounts are usually between 10% and 20%.
Redemption provisions upon default: Convertible loan notes will often include redemption provisions, where a list of triggers and default events will allow the investor to redeem the loan instead of converting it to shares.
The discount rate, typically 15% to 25% percent, gets applied to the per-share price of the new investor. For example, let's say your convertible note had a 20% discount and the new investors are paying $1 per share. The convertible note investor will convert at $0.80 per share.
Convertible loan notes (?CLN?) and advance subscription agreements (?ASA?) are ways of companies getting a cash injection which may later convert into shares, rather than being paid back in cash. ASAs tend to be shorter agreements than CLNs and therefore involve less negotiation.
The discount rate is a term in a Convertible Note or SAFE that gives investors a reduced price to that paid by the Series A investors. Typical discounts range from 0% to 20%.
What Is a Convertible Note? A convertible note is a short-term debt agreement that converts into equity at a future date. Usually, this happens when one of these events takes place: ? The company raises enough capital to reach a pre-determined benchmark.
Let's focus on the first methodology: The pre-money method. This allows you to calculate the price per share, which in turn helps you find the number of shares the convertible note holder and the new investor will eventually receive.
Discount rate: A reduced price (e.g., 10% to 35% lower) for when notes convert into equity. For instance, if the market rate is $2.50 per share and the convertible note has a 20% discount, the note holder can buy shares at $2.00.
Does the convertible note have to be paid back? In theory, because they are debt, convertible notes must be paid back. But in practice, this is rarely the case. If a startup fails to raise a priced equity round before the maturity date, it's highly unlikely it will have the funds needed to repay the note principal.
A prepayment isn't usually allowed, unless the majority of investors, by dollar amount, consent to it. This is because a prepayment more or less defeats the entire purpose of making a convertible note investment because it takes away the potential upside.