Reached verbal agreement with angel for convertible note - questions about typical loan period interest rate


1

We've done this a little differently than what I've been reading about in that we actually placed a valuation on the company (based pretty much on the work that has been done and the effort it would take to duplicate the functionality.)

Our investor is very laid back and we are writing/driving the terms.

I specified a loan term of 18 months at 4% annual interest rate, no payments due until the end of the term. Investor may convert to stock at any time until 30 days after full repayment(including interest). Company can repay early.

Is that interest rate and term reasonable? There is a high likelihood of repayment and high likelihood of profitability, however the full loan amount is at risk with no collateral/security.

If we cannot repay the loan within that time period we will have folded long before then.

Angel Convertible Note Loan

asked Mar 14 '10 at 16:33
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Tim J
8,334 points

1 Answer


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It's a good rule of thumb to make the convertible note rate be above the 10-year treasury note rate. There is a law about charging too little interest on a bridge loan but I don't recall the specifics.

The rate I have typically used is 5%. The 10-year T-note is at 3.71% as of the 12th. It's best to be on the high side of the interest rate just so you don't get into trouble.

In your case, both your term and interest rate look reasonable.

answered Mar 14 '10 at 23:22
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Jarie Bolander
11,401 points
  • Thanks - I'll adjust to 5% I think. – Tim J 8 years ago
  • As long as you have a rational basis for how the rate came up, you should be fine. Remember, that this is a "risky" loan so the interest should reflect that. – Jarie Bolander 8 years ago
  • Not sure why you got the down vote. It is risky, and that is why there is all the up-side available to the lender. – Tim J 8 years ago
  • I don't know either. BTW, congrats on getting close to funding – Jarie Bolander 8 years ago
  • Thanks Jarie, I am not sure if it is worth congratulations - it means we didn't execute fast enough on our own dime... This was not really a super-formal thing - it was something my partner and I kind of set up over the last year with a person we know, is in a similar field and has disposable income. We're not talking about a whole lot of money - essentially we need enough to cover 4-6 months of business expenses and a subsistence salary for my partner. We expect sales and revenue within that timeframe. – Tim J 8 years ago
  • But I do appreciate the sentiment - it means we can continue to operate and is an event that took work and had to be handled well. – Tim J 8 years ago
  • I would think that the issue with charging too little interest is a tax / IRS issue (my apologies if that's obvious). If you are asking if a 4% rate is reasonable for you, absolutely! I'm guessing that your counterparty has a lot of faith on you. Good luck! -e- – Ev Conrad 8 years ago
  • From what I have been told, it's an SEC issue. Charging too little, relative to risk, is a big warning sign that something other than an investment is going on. – Jarie Bolander 8 years ago
  • Ahh, makes sense. Thanks for the clarification. – Ev Conrad 8 years ago
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Angel Convertible Note Loan