Start-Up Entrepreneur Series: Convertible Debt

In the Start-Up Entrepreneur Series, I will be taking a deeper look into some of the most common questions early stage founders face in putting together and operating their new businesses.  

The Start-Up Entrepreneur Series will be published each Wednesday morning until conclusion. For more information, check out www.hoeglaw.com or drop Rick a line at rhoeg@hoeglaw.com.

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Unless your new start-up is fully capitalized by its Founders, one of the first questions a new company must ask itself is “How are we going to fund this thing?”.

Over the next few weeks, we’ll be looking into different funding avenues available to the start-up entrepreneur, as well as at the various types of investors from which a company might pursue those funds.  And for more in-depth analysis of preferred equity financings in particular, be sure to check out our Financing Term Sheet Deep Dive Series.

Today, we’ll talk a bit about one of the most prevalent forms of early fundraising: “convertible debt”.

Financing Term Sheet Deep Dive: Valuation

Whether you’ve only recently decided to seek out capital for your business or you’ve already received (or made) your first offer, the term sheet (or “letter of intent”) is an integral part of the process.  In this series we’ll look to shed some light on the legal language contained in a financing term sheet by taking a “deep dive” into the most often used terms and how choices made in selecting those terms can affect both the Company and the Investor.  

Financing Term Sheet Deep Dive will be published each Monday morning until conclusion. For more information, check out www.hoeglaw.com or drop Rick a line at rhoeg@hoeglaw.com.

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Last week we gave an overview of just what a financing term sheet is and why it is important (check it out here if you missed it). This week we begin our first real “deep dive” discussion.  To start us off, we’ll consider the top line item, the one of most concern to both Company and Investor alike: What is the price of the stock being sold? (Or, by corollary, how much of the Company does the current ownership have to “give away” in exchange for the investment?).

What we will see is that the answer to that question all comes down to what the parties “value” the Company at prior to investment:  the “pre-money” valuation.