A Convertible Note is a sophisticated financing tool. The present deal must be understood in the context of the forward-looking conversion or repayment events. General Standards has both implemented, and converted, many dozens of Convertible Notes.
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Convertible Notes are a sophisticated, yet common, financial tool that allows a startup to borrow funds that then convert into shares at a price determined by a future financing event. This is particularly helpful when startups require bridging finance on the way to a larger round, or there is difficulty in setting an investment valuation. SAFEs have supplanted the use of Convertible Notes for first rounds of capital.
Convertible Notes defer the investor’s participation as a shareholder, and may therefore require investors to have equity-like rights (such as pre-emptive rights to participate in any future share issue). Further, there can be complexities around binding investors to shareholder documents which may vary between the time of the Convertible Note and a future share issue. Consideration must also be given to what happens if the next share issue doesn’t occur, for good or bad reasons.
Where a Convertible Note investment is complex, a Term Sheet might also be used to assist with negotiation as the long form documentation can be extensive.
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