WeWork Labs Seminar: Raising Money by Convertible Debt
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The document discusses convertible debt as a financing option, characterized as a loan with equity features that allows conversion into equity under certain conditions. It outlines when to use convertible debt instead of equity, highlighting its advantages such as lower transaction costs and maintaining founder control, as well as drawbacks like conversion discounts. Additionally, it details market terms for convertible debt, including loan terms, conversion triggers, and repayment structures in various scenarios.
WeWork Labs Seminar: Raising Money by Convertible Debt
- 1. WeWork Labs Seminar: Raising Money by Convertible Debt Jen Berrent Jared DeMatteis October 15, 2013 Attorney Advertising
- 2. Raising Money by Convertible Debt Topics What is convertible debt? When should I use convertible debt instead of equity? What are the market terms for convertible debt? © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 2
- 3. What is convertible debt? Convertible debt is a loan with equity features Debt terms: principal, maturity, interest Debt claim priority against assets Principal (and sometimes accrued interest) may be converted into equity Conversion may be at the option of the holder or the company, and may be subject to certain contingencies Often convertible (sometimes at a discount) into securities issued in first equity round raised from outside investors © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 3
- 4. When should I use convertible debt instead of equity? Pros – Few variables to negotiate (so quick with low transaction costs) – No current valuation need be set – Maintains control by the founders Cons – Not a “priced” round – Converts at a discount in the next round – Often includes a “cap” on conversion price into next round © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 4
- 5. What are the market terms for convertible debt? Loan Terms Aggregate Amount Proposed Minimum Investment Initial Closing Interest Rate Due Date of Notes © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 5
- 6. What are the market terms for convertible debt? Conversion upon a Qualified Financing Definition of a Qualified Financing Discount to Purchase Price Cap on Purchase Price © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 6
- 7. What are the market terms for convertible debt? Conversion upon a Sale of the Company Definition of a Sale Payment to Noteholders: – Based on conversion into Common Stock – Fixed return (multiple of principal) © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 7
- 8. What are the market terms for convertible debt? Conversion at Maturity At the Election of Company and/or Election of Noteholder(s) Conversion Rate – Fixed at initial issuance of notes – Calculated at maturity (based on fully-diluted equity outstanding) Wilmer Cutler Pickering Hale and Dorr LLP is a Delaware limited liability partnership. WilmerHale principal law offices: 60 State Street, Boston, Massachusetts 02109, +1 617 526 6000; 1875 Pennsylvania Avenue, NW, Washington, DC 20006, +1 202 663 6000. Our United Kingdom offices are operated under a separate Delaware limited liability partnership of solicitors and registered foreign lawyers authorized and regulated by the Solicitors Regulation Authority (SRA No. 287488). Our professional rules can be found at www.sra.org.uk/solicitors/codeof-conduct.page. A list of partners and their professional qualifications is available for inspection at our UK offices. In Beijing, we are registered to operate as a Foreign Law Firm Representative Office. This material is for general informational purposes only and does not represent our advice as to any particular set of facts; nor does it represent any undertaking to keep recipients advised of all legal developments. Prior results do not guarantee a similar outcome. © 2014 Wilmer Cutler Pickering Hale and Dorr LLP © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 8