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What is a Convertible Note Term Sheet?
A Convertible Note Term Sheet is a simple, non-legally binding document that records the major terms of negotiation between a company and investors for the issue of convertible notes.
Creating a Convertible Note Term Sheet helps facilitate discussion between the company and its investors in the negotiation stage.
Given the non-legally binding nature of a Convertible Note Term Sheet, it is necessary for the parties to execute a Convertible Note Instrument or Convertible Note Subscription Agreement to record the binding terms in full.
- a qualified financing (i.e., a subsequent fundraising by the company which exceeds a certain minimum amount): the note will be converted into the same class of equity issued by the company at the qualified financing (typically preferred shares with additional rights compared to common equity);
- a liquidity event (i.e., a change of control or listing): the note will be converted into ordinary shares right before the liquidity event; or
- if neither of the above happens, on the maturity date (i.e., the due date of the debt): the note will be converted into shares, typically ordinary shares.
- a discount to the fully diluted price per share – compared with the price paid by investors in the qualified financing or the reference price for the liquidity event; and
- a cap on the fully diluted price per share at which the conversion will occur. In the documentation you will find in the Zegal app, this cap is expressed as a cap to the post discount pre-money valuation at the conversion event.
Key terms explained
Key points included
- Aggregate principal amount;
- Principal amount;
- Interest rate;
- Maturity date;
- Discount rate;
- Valuation cap; and
- Qualified financing amount.