Quais são as formas mais comuns de estruturar uma nota conversível?

Structuring a convertible note requires careful consideration of key elements. Typically, convertible notes feature the principal amount, interest rate, maturity date, and conversion terms. The conversion discount and valuation cap are crucial components influencing the conversion of the note into equity. Balancing these factors is vital for both the investor and the startup. Including a conversion trigger event, such as a subsequent financing round, provides clarity on the conversion timeline. Regular legal consultation ensures compliance with relevant regulations and alignment with the parties' expectations.

Let's face it, you cannot play around the interest rate much! It should be some market average unless you really know how to make things work otherwise. Studying the industry and similar offerings will have to be a must do home work

Interest rates are influenced by a variety of factors, including market conditions and the specific country's economic environment. The variability in interest rates can be significant, and they often reflect broader economic interests. While interest rates are an important consideration, they should not be a primary concern. Instead, focus on negotiating terms that support the long-term success of the startup. In order of importance, prioritize the following when negotiating: the amount of funding, conversion terms, valuation cap, interest rate floor, and finally, the interest rate itself. It's crucial to choose your battles wisely, targeting negotiations that genuinely benefit the startup's long-term objectives.

The reality with these maturity dates is that most investors are not going to expect any actual repayment. So it more often than not results in extensions, until a priced round takes place for a conversion event to happen. This is why you see notes used less at the pre-seed stage, which realistically is about 2-4 years from a priced round (assuming it happens at the Series A). Notes make a lot of sense in between rounds that are Series A and beyond.

The reality with these maturity dates is that most investors are not going to expect any actual repayment. So it more often than not results in extensions, until a priced round takes place for a conversion event to happen. This is why you see notes used less at the pre-seed stage, which realistically is about 2-4 years from a priced round (assuming it happens at the Series A). Notes make a lot of sense in between rounds that are Series A and beyond.

These discounts tend to be closely in line with that of SAFEs, in the event a discount is being used with or in place of a valuation cap. I often find that if there is a discount, then it is generally 10% or 20%, less often do I see 25% or 30%. Anything beyond that would be very uncommon.

Offer your potential lead investors a slightly higher discount rate as a sweetener! Once you have your first commitment the rest of the round gets much easier to close. You can also offer your convertible in tranches (time-based or value based) with better conditions for early commitments. This can also help gain traction early on.

The discount on convertible notes is a strategic tool used to attract influential investors who can enhance a startup's credibility and draw additional backers. Typically, these discounts range from 10% to 20%, with higher discounts up to 30% being less common and usually indicative of higher risk or exceptionally favorable terms. Offering a more significant discount can be a tactical move to secure investors whose involvement adds substantial value beyond their capital contribution. Although it's recommended to apply these discounts consistently in time to avoid suspicion and ensure equity, transparency and fairness in setting these terms are essential to maintaining a trustworthy relationship with all parties involved.

Valuation caps are very common for SAFEs and Notes, and they are used as a proxy for valuation even though a round technically does not have a valuation unless it is a "priced" equity round. Caps should be backed into based on a couple key factors: 1) How much dilution in the round? (How much is the founder willing to give up to investors). Be careful not to give away too much, too early. 10-20% is the common band within a given round. 2) How much capital needs to be raised? (What is the amount that is required to build to the next stage, hit specific milestones, and derisk the startup). The amount raised and the amount of dilution will back into a (valuation) cap that makes sense. $2M raised and 20% dilution --> $10M cap (post)

Valuation caps make convertible notes more akin to traditional equity rounds, facilitating a better alignment between the two financing structures. They balance investor interests with company growth potential, yet they can also complicate subsequent negotiations, influencing the capital structure and equity distribution. Carta's benchmark data from 2015 to 2021 highlights that the average valuation cap in SAFE rounds steadily increased from $8.8 million to $15.9 million, reflecting rising startup valuations at financing. SAFE rounds reached their zenith in 2020 with 2,418 rounds, marking a significant growth from 564 in 2015. The Average Annual Growth Rate (AAGR) of valuation caps was approximately 10.36% per year.

As a small business you need to get used the following word! Rejection ... the solution to this is 'Try again'! Here are a few reasons to consider non conventional methods like Crowd Funding or popular Convertible Notes.: here are examples of rejection.: rejection due to your short credit history rejection due to insufficient collateral rejection due to a misunderstood business plan At a stage 3 of a Rejection do not forget why you started the business ... Finally at a 4th attempt ... you reached success. you revised a plan plan, provided better financial documents, and secured a loan. MORAL OF THIS STORY IS NOT FUNNY Tell them what they want to hear! It works ! Perseverance pays off. Rejection is the start to success ...

Some other less common terms: Automatic vs Voluntary Conversion: Convertible notes may automatically convert to equity during key financial events or investors can opt for voluntary conversion to capitalize on favorable valuations. Prepayment Option: Companies can prepay their debt before it converts to equity, usually at a premium. Most Favored Nation (MFN) Clause: This clause ensures early investors receive terms no less favorable than those given in later rounds, maintaining investment fairness. Change of Control, Security Interest, and Debt Covenants: Though less common, these terms are crucial during significant corporate changes, ensuring protection for investors and company stability.

A bright startup can afford including a "flying pig event" as a marker or a condition to trigger an agreed algorithm. Experienced investors see no threat in a "weird" trigger/condition once it fits their investment book.

Other key elements are: 1) Most favored nation (MFN) clause that helps you get better terms if a new convertible is offered at more investor friendly terms while your note is still outstanding, and 2) a Change of control minimum return guarantee for situations where there’s a non-trivial chance of a CoC (or even dissolution) while the note is outstanding It’s also important to remember that conversion mechanics have a definition of fully diluted capitalization which needs to be fully comprehended (can make a non-trivial difference in the conversion price). Similarly, voluntary conversion at term should be well understood/defined. Lastly, any amendments mechanisms (can they be made with majority investors?) should also be looked into.

Convertible notes serve as a form of debt financing commonly utilized by startups for early-stage funding, with the potential to convert into equity at a later date. Key terms in convertible notes include the principal amount (the invested sum), interest rate (applied to the principal), maturity date (deadline for repayment or conversion to equity), conversion discount (a percentage deducted from the conversion price), and valuation cap (a maximum company valuation for conversion purposes). While these terms can vary based on individual circumstances, they are often negotiated between the company and investors.

There are legal limitations to issuance of convertible notes in some countries. It is good to check all the formalities before declaring the funding mechanism