Thoughts are below - this assumes a syndicated round (typcial seed round), some of this is unnecessary if the company is just dealing with one or two institutions / vcs
1. Discount rate - 15%-30% is typcial, some times this is stagger so that the discount rate increase the longer it takes to get the financing done
2. Cap on valuation for conversion - companies should try to avoid this if possible, as it could result in a significant discount if the next equity round is at a high pre-money valuation
3. Interest rate - typically 6-8%
4. Security Interest - typcially none - do not over complicate things
5. There should be a provision that provides that a majority or super majority in-interest of the Invetors can waive amend terms in order to avoid having to herd cats
6. Term - this should be about the time the company anticipates running out of the money it is raising
Other considerations:
- what happens if the company does not raise money or is sold - some investors will want the loan to convert into common at pre-designated price or in the case of the sale, they may want some multiple of their money back as a prepayment penalty
- try to limit investors to just accredited investors to avoid securities laws complexities
- try to identify one anchor investor to "set" the terms and avoid multiple negotiations
- VCs will want their expenses covered - individual investors may not
- agree upfron that the docs with be short and sweet (no extensive reps / covenants, etc.) - goal should be to keep it simple and keep the costs down for this type of financing
- Investors may want a minimum dollar amount of commitments before funding - i.e., the first investors don't put there money in until the company gets enough interest to fund itself to the next inflection point
Answered 1 year ago by Robert Bishop
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