#convertible equity

[equityfinancialservices]

Convertible Equity: A Flexible Financing Option for Your Business

Looking for a flexible way to finance your business? Learn how convertible equity can provide the capital you need without immediate dilution. Discover its benefits and how it can be a strategic choice for your company's growth. Visit to explore more at Eurasian Capital, LLC.

[theimmigrantstoolbox-blog]

SAFE - A Replacement for Convertible Notes (Y-Combinator)

SAFE - Simple agreement for future equity.

a new alternative to convertible notes that has the advantages of convertible debt without some of the disadvantages.

http://bit.ly/1qCcnjv

[theimmigrantstoolbox-blog]

Convertible Equity For The Mass Market Investor

Coming soon to an equity crowdfunding site near you: the opportunity to buy the sort of convertible equity that Silicon Valley investors have been cashing in on for years.

http://onforb.es/TKSB8o

[arushibhandari]

How do convertible securities work?

Convertible securities like convertible debt/notes and convertible equity are commonly used to provide both seed and venture funding to early stage startups. In convertible securities the investment is given right away to the startup but conversion to equity happens during the next round of financing or as described in the terms of the security agreement. To compensate for the added risk in investing in early stage startups, convertible securities have features like:

i) Discount rate

ii) Valuation cap

iii) Return Provision

Discount Rate:

Discount rate is the discount on the Series-A, or other relevant valuation at which the convertible security investment is converted to equity. Discount rate determines how much the investor is compensated for taking the early risk.

Example:Investor A has a convertible note of $100,000 with a discount rate of 20%. If a qualified funding round, like Series A generates a price/share of $1, other investors get shares at $1/share while the investor A gets to purchase shares at 20% discount hence at $0.80/share. Number of shares owned by investor A = $100,000/$0.80 = 125,000 shares.After the conversion of the convertible note to equity, the convertible note is cancelled.

Any ‘new’ investor who contributes $100,000 as investment will receive 100,000 shares @$1/share.

Valuation Cap:

Valuation Cap refers to the pre-money valuation limit set in the convertible security agreement at which the convertible security investment is converted to equity. It does not imply that the company’s pre-money valuation is equal to the cap. It just implies that the actual pre-money valuation will be determined later but in no case would it be higher than the cap. The cap thus helps to set the conversion price at which the investors security would be converted to equity.

In a qualified round of financing, say Series A, if the actual valuation is greater than the cap mentioned in the agreement the investor will convert to equity at agreed cap in the agreement even though it is lower, else it will convert at the valuation.

*Price/share calculated as Pre- Money Valuation Cap/ Outstanding shares

Return Provision:

A return provision is basically repayment of  the investor’s principal “x” times. It could be 2x,5x or any other multiple negotiated with the investors.

Raising funds is all about negotiation. To raise money successfully both investors and founders can agree on one or more than one of the above stated provisions (discount, price cap or return provision).

Do convertible note investors receive IRS form 1099-INTs from the company after their note converted to equity?

If the note pays interest periodically (could be annually or semi-annually as specified in the agreement), the investor must recognize interest income when it is received. If the note requires interest to be accrued and not paid till maturity, it is still treated as paid. Per the requirement under federal tax rules, the company must still issue Form 1099-INT to the investor. There are numerous tax issues on convertible notes most of which largely depend on whether the note is characterized as debt or equity instrument.

About The Author

Arushi Bhandari is an MBA and a licensed CPA in the state of California. She has helped several Silicon Valley startups at different stages with their accounting and tax related issues. Her publications eBooks - STARTUP Financing, Equity and Tax and Introduction to Equity Compensation are available on Apple iBookstore, Amazon Kindle and Google Play. She maintains a public blog at www.startuptaxaccounting.com especially aimed at startups, and has guest blogged at different startup platforms such as The Startup Garage and Belmont Acquisitions.

DISCLAIMER: The information provided is intended to educate the readers and a more definite answer should be based on a consultation with a lawyer or CPA.It should not be relied upon as legal advise because the information might be incomplete and answers could change depending upon circumstances and if all facts were known.

[arushibhandari]

Convertible Equity

Convertible equity refers to investment which gets converted to equity with no requirement of repayment of the principal or investment.

Convertible Equity is a fairly new funding way for early stage startups. The most common method has been convertible debt. Unlike convertible debt where principal/investment is either paid off at maturity along with accrued interest or gets converted to preferred shares upon closing of a qualified round of financing, investment in convertible equity at the expiration/maturity of the agreement is converted to common stock generally at the set valuation cap.

Convertible equity can have all features of convertible debt like discount, price cap, forced conversion to equity etc.

Pros and Cons of Convertible Equity

Pros:

For entrepreneurs, unlike convertible debt, there are no interest payments mandated or a set adherence to interest rates set by the IRS and no maturity date for repayment.

Investors in convertible equity can benefit from lower capital gains tax rate by having their investments treated as " qualified small business stock."

Convertible equity eliminates a major threat that convertible debt/notes possess i.e. forcing the startup into bankruptcy in cases of non-repayment of the notes.

Cons:

Most investors are reluctant to adopt convertible equity as there is no added benefit of accrued interest or repayment of principal as in the case of traditional debt or convertible debt/notes.

Where is Convertible Equity recorded on the Balance Sheet?

It is recorded under the Liabilities section of the balance sheet as " Convertible Notes Payable".

  How Convertible Equity works?

Example:

Issued and outstanding shares = 1,000,000

Pre-Money valuation = $1,000,000

Investor's investment = $250,000

  Price/Share = $1 ( $1m pre-money valuation /1m outstanding shares) and hence investor receives 250,000 shares at expiration of convertible equity agreement.

Percentage ownership of investor = $250,000/$1,250,000 = 20%

Post - Money Valuation = $ 1,250,000 ( Pre-Money Valuation + Investment)

About The Author

Arushi Bhandari, CPA, MBA recently published an eBook "STARTUP Financing, Equity and Tax" with insights about the impact of JOBS Act & Dodd Frank Act on startup funding, terms like angel, accredited investors, venture capitalists, stock options, Restricted Stock, RSUs. It gives in depth examples & templates explaining documents like Term Sheet, Cap Table, Convertible Securities plus the importance of 83(b) filing.

Links to Download Arushi’s eBook Apple iBook: STARTUP Financing, Equity and Tax Kindle edition STARTUP Financing, Equity and Tax

DISCLAIMER: The information provided is intended to educate the readers and a more definite answer should be based on a consultation with a lawyer or CPA.It should not be relied upon as legal advise because the information might be incomplete and answers could change depending upon circumstances and if all facts were known.