Quick Answer: Why Does A Company Offer Convertible Senior Notes?

Can a convertible note be paid back?

Convertible notes contain a maturity date provision at which point the notes are to be repaid with interest.

This is usually set at 18-24 months after the first convertible note investment.

However, repayment of the notes upon the maturity date is usually not a great scenario for the company or the investors..

What is a safe convertible note?

SAFE notes are a form of a convertible security. They are used as a legally binding promise that, at a later date, an investor will be given the opportunity to buy shares at an agreed price. … As such, they are a relatively new option for investors and startup founders.

What is a convertible note offering?

Share. A convertible note is a form of short-term debt that converts into equity, typically in conjunction with a future financing round; in effect, the investor would be loaning money to a startup and instead of a return in the form of principal plus interest, the investor would receive equity in the company.

What happens when a convertible note matures?

Maturity Date: Convertible notes carry a maturity date, at which the notes are due and payable to the investors if they have not already converted to equity. … The most common method of conversion occurs when a subsequent equity investment exceeds a certain threshold. This is called a qualified financing.

When can convertible notes convert?

The maturity date is a deadline for a preferred round, and only during a preferred round can a convertible note convert into equity. Let’s say there was a maturity date of 2 years from the date of investment. If the company hasn’t had a preferred round within 2 years, the investor could demand their money back.

Are senior notes bad?

Senior notes are bonds that must be repaid before most other debts in the event that the issuer declares bankruptcy. That makes senior notes more secure than other bonds. That greater level of safety means investors earn slightly lower interest rates.

What happens to convertible note if startup fails?

If a company raises money on a note and the company fails, the investors are creditors, getting money back prior to any shareholder and any creditor that doesn’t have security or statutory preference. … The practical answer is that if the company fails, the note holders will get nothing.

What is the difference between a convertible note and a safe?

Both SAFE and convertible notes allow for a conversion into equity. The difference here is that while a convertible note can allow for the conversion into the current round of stock or a future financing event, a SAFE only allows for a conversion into the next round of financing.

Is convertible note debt or equity?

What is a Convertible Note? A convertible note is short-term debt that converts into equity. In the context of a seed financing, the debt typically automatically converts into shares of preferred stock upon the closing of a Series A round of financing.

Why do companies issue notes?

Companies issue bonds to finance their operations. Most companies could borrow the money from a bank, but they view this as a more restrictive and expensive alternative than selling the debt on the open market through a bond issue.

Why are convertible notes bad?

When convertible debt is used, there is a misalignment between investors and entrepreneurs. Founders want to use high valuation caps or worse, no valuation caps, and prolong the amount of time before conversion, so that investors get the short end of the stick.

What does it mean when a company offers notes?

Key Takeaways. A note is a legal document that memorializes a loan made from an issuer to a creditor, or to an investor. Notes typically contain the terms in which the creditor is paid back, including the time frame in which the transaction concludes.

What is a senior convertible note?

A senior convertible note is a debt security that contains an option in which the note will be converted into a predefined amount of the issuer’s shares. A senior convertible note has priority over all other debt securities issued by the same organization.

What is the meaning of notes payable?

Notes payable is a liability account where a borrower records a written promise to repay the lender. When carrying out and accounting for notes payable, “the maker” of the note creates liability by borrowing from another entity, promising to repay the payee with interest.

Are convertible notes a good investment?

So at the end of the day, convertible notes (and other deferred pricing structures like SAFEs) are not good for investors and they are also not ideal for entrepreneurs. Their defects tend to get over-looked in very small rounds because they are a cheap and easy transaction to do.

Why convertible notes are safer than SAFEs?

Both SAFEs and convertible notes convert into equity in a future priced equity round; a convertible note may have more complexity to when/if/how it converts. … Generally speaking, SAFE notes mean less risk for the founder and more risk for the investor.

Why would a company offer convertible senior notes?

When money is tight, and stock prices are growing, even very credit-worthy companies will issue convertible securities in an effort to reduce their cost of obtaining scarce capital. … By this logic, the convertible bond allows the issuer to sell common stock indirectly at a price higher than the current price.