1. (convertible debt, bridge loans)

2.  It’s debt…
 Must be paid back (plus interest) if it doesn’t convert
 Goes on balance sheet as a liability
 It’s equity…
 If it converts to equity…it’s no longer debt
What’s all this talk about conversion?

3. If I wait just a few
more months, I can
get a higher
valuation…
$2.0 M
Need
Self-fund Cash
Series A
Bridge Loan (first funding)
6 months

4. Six months later…
Convertible Note Series A
• Loan amount: $100,000
• 25% discount $2 M
• 8% interest rate
• Qualified financing: $1M
• Uncapped
• 12 month maturity
Debt gets converted into an equity
stake in the newly valued company

5. Series A
$2 M
valuation
Amount owed
Convertible Note $100,000 + 8% =
• Loan amount: $100,000 $108,000
• 25% discount
Investor owed $108,000
• 8% interest rate in conversion to equity
• Qualified financing: $1M
• Uncapped Assume we issued 2,000,000
shares at $1.00/share
• 12 month maturity
Activate 25% discount
$108,000 / $0.75 = 144,000 shares Investor gets $144,000 in
of stock = 7.2% ownership equity on $100,000 investment

6. This gets really
complicated very fast…
Depends on equity stake taken by Series A
investors, warrants, what happens if the
company gets sold, and other legal stuff…
What’s all this talk about caps?

7. Series A
$2 M
valuation
Amount owed
Convertible Note $100,000 + 8% =
• Loan amount: $100,000 $108,000
• 25% discount
Investor owed $108,000
• 8% interest rate in conversion to equity
• Qualified financing: $1M
• Capped at $500k Assume we issued 2,000,000
shares at $1.00/share
• 12 month maturity
But the cap means that we
have to treat it like they
issued 2,000,000 shares at
$108,000 / $0.20 = 540,000
$0.25 each for a $500k
shares of stock = 27% valuation cap

8. Series A
$10 M
valuation
Amount owed
Convertible Note $100,000 + 8% =
• Loan amount: $100,000 $108,000
• 25% discount
Investor owed $108,000
• 8% interest rate in conversion to equity
• Qualified financing: $1M
• Uncapped Assume we issued 2,000,000
shares at $5.00/share
• 12 month maturity
$108,000 / $4.00 = 27,000
shares of stock = 1.35%

9. No cap causes misaligned incentives
 Note investors want a lower Series A pre-
money valuation (get more % of company)
 Founders want a high Series A pre-money
valuation (want their stock to be worth a lot)

10. Advantages Disadvantages
• Easier (less paperwork, due • Setting a cap is hard
diligence, etc.) • Some Series A investors
• Faster hate notes
• Lower legal costs • If you don’t have a qualified
(debatable) financing by the maturity
• Postpones valuation to date, you have debt
future round • Potential for misaligned
• No board of directors seats, incentives
etc. • Convertible notes aren’t
• More control over company backed by assets