What Is A Convertible Agreement?
When we talk about business, we might be very familiar with the convertible agreement. This is a short-term debt that is turned into equity. The benefit of this loan is the investor doesn’t have the right like the shareholder. Furthermore, because this loan is short-term, then this loan is executed faster. Usually, it is executed within a couple of weeks.
However, this convertible note agreement has a disadvantage in which the investor has a right to claim the assets first.
When Do You Need Convertible Agreement?
Note that there are some scenarios for this agreement. The first scenarios are serving as the “bridge financing” which is used before the large financing round. However, this one is pretty tricky that you have to convince the investor everything is running well. When you lose at the investor’s confidence, then it is bad for your fundraising process.
The second term of using this agreement is when the entrepreneurs and investors cannot meet the deal of valuation.
Elements Of Convertible Loan Agreement?
- Maturity date – It is the date when the loan matures which the investor might need the repayment on this date. Why? Because they need to keep themselves from the downside. Furthermore, if a business is not running well, they still need the investment and also its interest which later will lead them to kill the startup when they cannot repay the loan.
- Interest rate- A business to pay the loan which the business doesn’t pay the cash that much but turn it to the equity.
- Conversion – This part is very crucial which should be explained clearly about the terms and conditions of how the loan is turned to the equity. When the business raises more than a certain number, then the loan will be automatically equity. However, if the business, doesn’t raise more funds, then the investor can decide whether they want to convert it or not.
- Conversion discount – The loan is turned to equity with a conversion discount.
- Valuation cap – This is about the maximum valuation of loans that will be converted.
How To Make A Convertible Agreement
There are several steps you have to follow to make a perfect convertible agreement, which are:
- Think of the format – The format should be simple and makes the agreement easy to understand. You can download our convertible note agreement for free here.
- Get the knowledge – Being logic, is not enough. You need something else to make your agreement strong and clear.
- Start drafting – The next step is starting to draft the agreement. With using our template, you have the right format which suits for business and formal situation.
- Revise it – Revision becomes the crucial thing to avoid any mistakes so you will not discourage the investor.
Next, you can pass it on with a small group of investors and show the potential of your business. Be clear on your presentation and show your agreement once you get the deal. Good luck!
Convertible Agreement Template Sample