Convertible Notes

Raise Capital with Convertible Notes

Convertible Notes are an innovative financing mechanism for Australian ventures and corporates. We specialise in convertible notes and arranging the commercial terms for issuers (startups and SMBs looking for capital) and investors (buyers of the convertible notes).

How do Convertible Notes Work?

A Convertible Note or Convertible Bond is an investment mechanism often used by venture capital and seed investors investing in startups who wish to delay establishing a valuation for that startup until a later round of funding or milestone.

Convertible notes are structured as loans with the intention of converting to equity. The outstanding balance of the loan is automatically converted to equity at a specific milestone, often at the valuation of a later funding round. In order to compensate the investor for the additional risk of investing in the earlier round, convertible notes will sometimes have additional clauses, such as caps or discounts.

Advantages of Convertible Notes

The primary advantage of issuing convertible notes is that it does not force the issuer and investors to determine the value of the company when there really might not be much to base a valuation on – in some cases the company may just be an idea. That valuation will usually be determined during the Series A financing, when there are more data points off which to base a valuation.

Valuation Cap

A valuation cap in a convertible note is a bonus for investment risk. The Valuation Cap places a cap on the price at which the notes convert into equity and provides convertible note holders with equity-like upside if the company takes off out of the gate without excessive dilution.

Faster Access to Capital

Convertible notes are a faster way of funding a venture, they require much simpler documentation (see the Tools section for a sample termsheet) and much quicker and simpler due diligence. The primary question for the investor is will the company be able to repay the loan within 1-2 years usually from a refinancing or equity issue round or will they grow so fast that the valuation skyrockets and the notes convert into equity.

Starting a Convertible Note Capital Raising

At Kapitalized we’ve developed a process to help entrepreneurs access convertible notes funding. Contact us to discuss starting the process.

Features of Convertible Notes

  • No valuation required
  • Provides a discount on future equity rounds
  • Can have an interest coupon attached
  • Fast due diligence
  • Simple contract
  • Can be repaid with equity dilution

Features of Equity Funding

  • Extensive due diligence
  • Complex legal agreements
  • Requires a valuation
  • Can be preferential to the investor
  • Investor needs high exit multiple
  • Best for later capital rounds