Convertibles were popular in the post 2000 tech meltdown as a way to protect angels from VC down rounds. But they were never a good idea. The biggest reason is that they are not fair. I explain of the reasons why is at http://www.angelblog.net/Convertible_Note.html.

A much better solution with the same benefits is the Exchangeable Share http://www.angelblog.net/Exchangeable_Shares.html

I hope this helps your readers. Basil

Convertibles were popular in the post 2000 tech meltdown as a way to protect angels from VC down rounds. But they were never a good idea. The biggest reason is that they are not fair. I explain of the reasons why is at http://www.angelblog.net/Convertible_Note.html.

A much better solution with the same benefits is the Exchangeable Share http://www.angelblog.net/Exchangeable_Shares.html

I hope this helps your readers. Basil

Good question but tough to answer given that each situation will be different. Its kind of like if a complete stranger walked up to you and asked you how much he should sell his car or house for. Nevertheless, at the risk of over generalizing the way I would personally look at this is to look for a total bump of 20% to 40% (interest & conversion discount combined). I’d look for the interest to be the smaller part, somewhere in the 5% to 10% range.

Although convertible debt avoids assigning a dollar valuation to the company, all of the factors that would drive the valuation discussion do still come into play for a convertible debt deal. For example, a company with strong management, strong IP, large market will command a higher valuation. Correspondingly with the convertible debt structure, such a company will be able to offer a smaller discount on conversion. The conversion percentage will also depend on the stage the company is being financed. Just as with the ‘hockey stick’ phenomenon on revenue (i.e. its easier to double your revenue when you are at $100,000 than when you are at $10,000,000) a similar parallel exists on the valuation side. If financing is done at a very early stage (when say the company has a valuation of a few hundred thousand dollars), it is entirely feasible that the next financing round will double or triple the valuation assuming the company makes good progress. If the company is still early stage and has a valuation in the few million dollar range, it would not be realistic to expect a doubling or tripling in valuation for the next round. So when investors and the company are negotiating the conversion ratio, things such as how far out the significant financing round is anticipated, how much the company will progress, where the company is at now all need to be considered. In my 20% to 40% conversion range, I was assuming the company is off the ground (its not at the concept phase), has made reasonable progress in developing its offering, and the future financing event is 9-18 months on the horizon.

In my next article, I’ll talk about some of the other clauses found in term sheets. With any deal, its going to come down to negotiation for each side and what they feel is important. Sometimes investors want to maximize their return and will concede on other areas such as control. Other times investors want to have a strong say in the company so may accept a lower conversion in exchange for additional board seats. Throughout the term sheet negotiations it’s going to be a matter of give and take across many aspects.

Craig

Good question but tough to answer given that each situation will be different. Its kind of like if a complete stranger walked up to you and asked you how much he should sell his car or house for. Nevertheless, at the risk of over generalizing the way I would personally look at this is to look for a total bump of 20% to 40% (interest & conversion discount combined). I?d look for the interest to be the smaller part, somewhere in the 5% to 10% range.

Although convertible debt avoids assigning a dollar valuation to the company, all of the factors that would drive the valuation discussion do still come into play for a convertible debt deal. For example, a company with strong management, strong IP, large market will command a higher valuation. Correspondingly with the convertible debt structure, such a company will be able to offer a smaller discount on conversion. The conversion percentage will also depend on the stage the company is being financed. Just as with the ?hockey stick? phenomenon on revenue (i.e. its easier to double your revenue when you are at $100,000 than when you are at $10,000,000) a similar parallel exists on the valuation side. If financing is done at a very early stage (when say the company has a valuation of a few hundred thousand dollars), it is entirely feasible that the next financing round will double or triple the valuation assuming the company makes good progress. If the company is still early stage and has a valuation in the few million dollar range, it would not be realistic to expect a doubling or tripling in valuation for the next round. So when investors and the company are negotiating the conversion ratio, things such as how far out the significant financing round is anticipated, how much the company will progress, where the company is at now all need to be considered. In my 20% to 40% conversion range, I was assuming the company is off the ground (its not at the concept phase), has made reasonable progress in developing its offering, and the future financing event is 9-18 months on the horizon.

In my next article, I?ll talk about some of the other clauses found in term sheets. With any deal, its going to come down to negotiation for each side and what they feel is important. Sometimes investors want to maximize their return and will concede on other areas such as control. Other times investors want to have a strong say in the company so may accept a lower conversion in exchange for additional board seats. Throughout the term sheet negotiations it?s going to be a matter of give and take across many aspects.

Craig

For a tech startup raising their first angel round of a few hundred k, what range would be reasonable or typical?

For a tech startup raising their first angel round of a few hundred k, what range would be reasonable or typical?