An essay by John Melonakos
Terms of Convertible Note Financing
A few days ago, I posted the documents that we used to raise a friends & family convertible note round. At the request of Knox Massey, who played a leading role in the 2013 Invest Georgia VC Fund & 2013 Georgia Angel Tax Credit, I’m pulling the salient terms of the convertible note documents into this post for discussion. I think these terms are commonly used by angel investors in the Atlanta area and am interested to hear your thoughts.
Terms of the Note
- Some of our investors had 2-year notes and others had 3-year notes (we started with 3-year notes when it was just family and had to move to 2-year notes when we added more institutional angels)
- 8% interest per year on the notes (standard rate)
Terms of the Conversion to Equity (Warrants)
- Warrant percentages equaling 5% if next round securities are sold within 6 months of the closing date, 10% between 6 months and 12 months of the closing date, and 15% after a year (designed to put pressure on the startup to close equity financing quickly)
Terms of an Exit (or Liquidation) while Holding the Note
- The pool of note holders share in 10% of the net proceeds of the exit (or liquidation), with a 3x capped return on investment (designed to be more biased towards the entrepreneurs if they end up exiting quickly rather than raise equity financing; the 10% number will change depending on the size of the pool of investors)
- Notes may not be repaid within 120 days prior to an exit (or liquidation) event, without note holder consent (designed to protect the investors against prepayment when an early exit outcome is on the horizon)
What terms have you seen for convertible note financing?