Washington Term Sheet - Convertible Debt Financing
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How to fill out Term Sheet - Convertible Debt Financing?
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FAQ
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.
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.
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).
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 debt is a debt hybrid product with an embedded option that allows the holder to convert the debt into equity in the future. The ratio is calculated by dividing the convertible security's par value by the conversion price of equity.
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).
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.
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.