Unless you are independently wealthy or you have wealthy (and generous) family or friends, you will probably need some other funding source to start or grow a business, whether in Florida or anywhere else. Fortunately, there are several options to raise money for your business. In some cases, you may be able to secure a traditional loan or, as we discussed last week, you may be able to qualify for seed round or Series A funding. In this week’s article, we’ll talk about the use of convertible notes to fund your Florida-based business.
What are convertible notes?
To secure any outside investment, you’ll usually need to answer some questions first. Specifically, a prospective investor will want to know what percent of the company they stand to receive in return for their investment. To provide an acceptable answer, you and he or she has to agree on how much the business is currently worth. The trouble is, reaching a consensus on that isn’t always easy.
The good news is the use of “convertible notes” as funding mechanisms delays the need to reach this agreement, making them a very popular choice among investors and entrepreneurs alike.
Here’s how this type of financing usually works:
- The investor gets a convertible note that matures within 18 months to three years.
- The initial note carries an annual interest rate, just like a normal loan.
- Principal and sometimes interest are typically paid in a single installment upon maturity.
- In the event that an equity financing arrangement is finalized prior to or on the maturity date, the note automatically converts to the same type of shares issued to new equity investors.
- In this case, the shares may be offered to the initial investor for the same price and based on the same terms as those available to the new equity investors.
- If your business does not obtain equity financing before the note matures, it becomes due just like any other loan.
The basic idea is that your business can use the proceeds from this type of financing to get the company up and running. Once it is generating cash flow, the valuation is less subjective and you stand a better chance of qualifying for equity financing.
Where we come in
If you decide to pursue this type of funding, you are going to need some help from qualified legal professionals. We can craft the required legal documents including:
- A convertible debt term sheet, which is used during negotiations and is not binding. It includes information about how much you intend to raise through this type of funding, the maturity date, the interest rate, and so forth.
- A convertible note purchase agreement, which should detail conditions for closing, relevant terms and so on.
- Convertible promissory notes, which are the mechanisms for the creation of debt.
You can learn more about this topic and anything else about operating a successful business in Florida by sending us a message online. You can also schedule a consultation with the business lawyers at Eskander Loshak LLP today by calling (954) 334-1122 or by email at [email protected].