Entrepreneurs love it, investors claim to hate it, but it’s still being used. Why? We’ll tell you, in this interactive Google hangout. Hear from the experts on the pros and cons of convertible debt. Experts: Ben Littauer – Walnut Ventures, Boston Harbor Angels Bob Bishop – Goodwin Proctor http://www.thecapitalnetwork.org/events/optimize-your-corporate-structure-for-investment-2/

1. On Air
Convertible Debt
December 12, 2013

2. Founders Workbench
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3. www.foundersworkbench.com

4. Today’s(Experts(
• Ben(Li3auer((
–
–
–
–
–
–
Advisory(Board,(The(Capital(Network(
Member,(Walnut(Ventures(
Member,(Boston(Harbor(Angels(
Director,(Several(Startups(
Former(Entrepreneur(
Geek((selfLdescribed!)(
• Robert(Bishop(
– Partner(Goodwin(Procter(LLP(
– Over(17(years(experience(represenTng(venture(capital(firms(and(high(growth(
companies(
– Founding(team(member(of(the(Founders(Workbench(
(

5. ConverTble(Debt(
(
Ben(Li3auer(
li3auer@blkk.com(
vizibility.com/li3auer(
@li3web(
(
Robert(Bishop(
rbishop@goodwinprocter.com(
(
(

6. Structure(of(an(Equity(Deal(
• Company(and(Investors(agree(on(a(“preLmoney(
valuaTon”((PM)(which(leads(to(a(price(per(share(
• Investors(put(in($X(
• Investors(then(own:(X(/((X(+(PM)(of(the(company(
Example:(
PM(=($1M(
X(=($0.5M(
Investors(own(0.5/1.5(=(33%(
(
Remember:(New(issuance(NOT(transfer(

7. What(about(ConverTble(Debt?(
• Many(seedLstage(companies(use(an(instrument(
called(ConverTble(Debt.(Huh?(
• ConverTble(debt(is(not(tradiTonal(bank(debt(
• Converts(exist(for(several(reasons(
– Investors(and(Entrepreneurs(find(it(hard(to(agree(on(a(
PM(valuaTon(
– SomeTmes(quicker(and(cheaper(to(document(than(
equity(deals((
– May(allow(for(“rolling(close”(accreTon(of(investment(
(

8. •
ConverTble(Debt(provides(
OpTonality(
Conver'ble*Debt*=((usually)(unsecured(debt(obligaTon(of(the(
Company(that(may(be(converted(into(equity(of(the(Company.((
(
• Conversion*Trigger*=(Qualified(Financing(usually(at(some(
minimum(amount(of(funds((ex.($500,000)(
• If*Notes*stays*as*Debt*=(Get(back(principal(and(interest(ahead(
of(other(equity((behind(other(creditors(typically)(
• If*Notes*Convert**=(Convert(amount(of(debt(and(interest(into(
equity(at(the(valuaTon(in(the(next(round(
• ( aier(applicaTon(of(a(Discount((oien(15(–(25%)(
• ( subject(to(a(maximum(valuaTon(amount((the(“Cap”)(
*

9. Basic(Structure(of(ConverTble(Debt(
• Investor(loans($(to(Company(an#cipa#ng(another(round(of(funding(
• Investment(accrues(small(interest((6L8%(typical)(
• When(the(funding(occurs,(investment(+(interest(convert(to(equity,(
usually(at(a(discount((15L25%(typical)(
(
Example:(
• Investors(loan($200K(to(Company((
• 20%(discount(
• As(of(conversion,(interest(of($10k(has(accrued(
• Next(Round(PM(=($2m;(1M(shares(before(financing(
• New(Shares(offered(at($2/each(
(
At(Conversion,(Noteholders(receive(210K(/(1.60(shares(=(131,250(shares(

10. Converts–(ComplicaTons!(
What(if(only(a(li3le(money(comes(in?(
When(does(the(debt(convert?(
What(happens(if(PM(of(next(round(is(huge?(
Does(the(investor(have(any(say(in(things?(
What(if(there(is(an(equity(investment(that(doesn’t(
trigger(conversion?(
• What(happens(if(it(never(converts?(
• What(happens(if(Company(gets(bought?(
•
•
•
•
•

11. Converts–(SoluTons?(
•
•
•
•
•
•
Caps(and(Floors(
Default(conversion(price(and(security(at(maturity(
Open(round,(minimum(close(
Quick(sale(preferences((ex.(2x)(
Governance(provisions(
Careful(a3enTon(to(conversion(condiTons(

12. Converts:(Worse(Than(Equity?(
• MulTple(liquidaTon(preference((circa(2008)(
– Ex.($500k(of(Notes(with(cap(at($2m(PM(
– Next(Round(at($6m(PM(
– Issue(Noteholders(3x(number(of(shares(
– 3x(shares(equals(3x(liquidaTon(preference!!(
• Without(a(floor,(effecTvely(Full(Ratchet(AnTLdiluTon(
• Preference(Overhang(
– In(prior(example(Noteholders(bought($262,500(of(
preference(for($200,000.(((
– All(other(Series(A(Holders(bought(1:1(preference(
• Not(Just(a(Price(Adjustment(

13. Converts:(When(Do(They(Work?(
• “Bridge”(financing(in(anTcipaTon(of(an(“event”(
– Another(financing(
– A(big(sale(
– Company(sale(
• Seed(stage(investment(
– ValuaTon(not(understood(
– Rolling(closes((oien(with(ratcheTng(caps)(
– Proof(points(as(an(“event”(
– When(the(investor(loves(the(company((cf.(exuberant(
equity(valuaTons)(

14. On Air
Convertible Debt
December 12, 2013