Plain english translation of these finance terms


3

What does these mean in plain English, guessing the best way to describe it is by giving theoretical numbers for best worst case instances, though that's just my thought - I'll leave it up to you to decided how to explain it:

The terms? $150,000 in convertible
debt. With no cap and no discount. If
you’re an investor you know exactly
what that means and you just shuddered
a little. Those aren’t terms that most
angels can match.


If you’re not an investor, here’s what
it means. Yuri and SV Angel just
offered to loan each company $150,000.
That loan will convert if/when the
company raises a proper angel or
venture capital round at the same
valuation that’s set in that round.
Most convertible debt has a valuation
ceiling and also gets a discount on
conversion. This debt doesn’t.

SOURCE: Start Fund: Yuri Milner, SV Angel Offer EVERY New Y Combinator Startup $150k

Funding Contract Finance Venture Capital Terms And Conditions

asked Jun 3 '11 at 01:56
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Blunders .
899 points
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  • What is the question? The second paragraph explains the first pretty well. – Tim J 8 years ago
  • @Tim: That's the point, I don't follow that explanation. Meaning I get that 150k is give on XYZ terms that are adjusted on further financing, what I don't get is what the terms are to start, and how the terms and value of the 150k might change in the future. Thanks, and happy to provided additional clarification if needed; just trying to understand, since these terms "appear" to be straight forward, though I still don't get it. – Blunders . 8 years ago
  • @Tim: For example, does "no cap" mean that there's no ceiling on the next round's valuation; meaning that if the company was valued at 300k in the 1st round, but 600k in the second, and only 150k more was raised in the second round, the founders still own 50% of the company, and their share is valued at 300k of the 600k valuation. No idea what the "no discount" means, or if I'm missing something else. Again, thanks! – Blunders . 8 years ago

1 Answer


5

A convertible note is a loan with the right to convert that loan to equity later on. One of the reasons it is used by startups and their investors:

  • No need to come to an agreement at a valuation - this is good because valuations can be very hard to do early on. It also removes some distraction and overhead this early to focus on other things. The valuation is deferred until another investment round.
The discount would be the preferential price that the investor who made the convertible loan would get at the time of a new financing round. This is done to acknowledge that the earlier investors took more risk and should get a return on that. Thus the original investor (the one converting the loan to equity) pays less for the shares at that point than the others who buy in at that round.

In the example you gave above - the early investor is betting that the quality of the startup is so good that they ust want to get in at the first valuation and don't need/want discount for their early loan.

A cap is the maximum valuation the lender/original investor will pay for equity. So for example if the company was valued at $100M at the subsequent round of funding and the convertible debt had a cap of $10M the original investor buys equity at 10M, not 100M

Take a look at this and other google searches for definitions of convertible debt.

answered Jun 3 '11 at 02:14
Blank
Tim J
8,346 points
  • +1 @Tim: Thank you, believe that covers all my questions. – Blunders . 8 years ago

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