Explores: - What is convertible debt? - When should I use convertible debt instead of equity? - What are the market terms for convertible debt?

1. Harlem Biospace Seminar:
Raising Money by Convertible Debt
Jen Berrent
February 10, 2014
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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?
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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
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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
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5. What are the market terms for
convertible debt?
Loan Terms
 Aggregate Amount
 Proposed Minimum Investment
 Initial Closing
 Interest Rate
 Due Date of Notes
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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
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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)
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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)
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