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Convertible Notes

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Convertible Notes 1/3. Editor’s note: Scott Edward Walker is the founder and CEO of Walker Corporate Law Group, a boutique corporate law firm specializing in the representation of entrepreneurs.

Convertible Notes 1/3

Check out his blog or follow him on Twitter as @ScottEdWalker. We are in the golden age of seed financing. Venture capital funds, seed funds, super angels, angel groups, incubators, and “friends and family” are all playing the seed financing game and investing early in startups in an attempt to land the next Facebook. As a result, the pendulum has swung dramatically in the founders’ favor, and the issuance of convertible notes for seed financing has never been more prolific. Indeed, as a corporate lawyer for 18+ years, I have seen this development first-hand.

This post is the first part of a three-part primer on convertible note seed financings. Part 3 will cover certain special issues, such as (i) what happens if the startup is acquired prior to the note’s conversion to equity? What is a Convertible Note? It can. Convertible Notes 2/3. Editor’s note: Scott Edward Walker is the founder and CEO of Walker Corporate Law Group, a boutique corporate law firm specializing in the representation of entrepreneurs.

Convertible Notes 2/3

Check out his blog or follow him on Twitter as @ScottEdWalker. This is the second part of a three-part primer on convertible note seed financings. Part 1, entitled “Everything You Ever Wanted To Know About Convertible Note Seed Financings (But Were Afraid To Ask),” addressed certain basic questions, such as (i) what is a convertible note? (ii) why are convertible notes issued instead of shares of common or preferred stock? And (iii) what are the advantages of issuing convertible notes? This part will address the economics of a convertible note seed financing and the three key economic terms: (i) the conversion discount, (ii) the conversion valuation cap and (iii) the interest rate. Part 3 will cover certain special issues, such as (i) what happens if the startup is acquired prior to the note’s conversion to equity? Convertible Notes 3/3. Editor’s note: Scott Edward Walker is the founder and CEO of Walker Corporate Law Group, a boutique corporate law firm specializing in the representation of entrepreneurs.

Convertible Notes 3/3

Check out his blog or follow him on Twitter as @ScottEdWalker. This post is the third part of a three-part primer on convertible note seed financings. Part 1, entitled “Everything You Ever Wanted To Know About Convertible Note Seed Financings (But Were Afraid To Ask),” addressed the basics. Part 2, entitled “Convertible Note Seed Financings: Econ 101 for Founders,” addressed the economics. This part will address certain tricky issues.

What Happens If a Startup is Acquired Prior to the Note’s Conversion to Shares of Preferred Stock? As discussed in part 1, in the context of a seed financing, a convertible note is a loan that typically automatically converts into shares of preferred stock upon the closing of a Series A round of financing. 1) Money Back, Plus Interest (Founder-Friendly). This is another tricky issue.