I finally got my second shot of the vaccine last week! With all the partners at Race now vaccinated, we will all be meeting again in person like normal soon. =)
Meanwhile, nothing has slowed us down. We have been super busy issuing term sheets and convertible notes every week! During my team call for FoundersHK this morning, I realized that many founders are comfortable with what to look out for when they reviewing term sheets and convertible notes.
In Silicon Valley, the convertible equity/note is a common form of financial vehicle for seed stage fundraising. The two most well-known forms are the SAFE
(by YC) and the KISS
(by 500 Startups). It is simply a note that converts into shares at the next financing round. Early stage founders and investors like me love it as it is fast, efficient and not much to negotiate.
These instruments are usually a few pages long, but here are a few items I usually would pay attention to:
Pre-money valuation cap - valuation of the company immediately before receiving investment in the current financing.
Post-money valuation cap - valuation of the company immediately after receiving investment in the current financing.
Discount - The “Discount Rate” applies to the price per share of the Standard Preferred Stock sold in the Equity Financing and is equal to 100 minus the discount percent (e.g., a 20% discount off the price per share of the Standard Preferred Stock equals a Discount Rate of 80%).
Pro rata rights - Fund investors usually want the right to participate in a subsequent round of funding to maintain ownership in the company.
Most favored nation: If you provide better terms to another investor, the MFN investor will automatically get the better terms.
Information rights: The right to access company financials and other similar information about the company.
Want to learn more? Amit Bhatti from 500 Startups did a talk on Convertible Securities. Check it out
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