Corporate Finance & Securities

The Low Down on Valuation Caps and Discounts in Convertible Notes

It is common for startups to raise early rounds of financing through convertible debt. Convertible debt, generally called a “convertible note,” typically converts into equity when the company raises another round of financing. In anticipation of the conversion, many investors will negotiate for valuation caps and discounts. In today’s post, I’ve highlighted the basics of valuation caps and discounts in convertible notes.

What is a Valuation Cap?

A valuation cap provides that the convertible note holders will convert their debt into equity at the lower of the valuation cap or the price in the subsequent round of financing. Without a valuation cap, the note holders would generally convert their debt into equity at the same price as the shares issued in the...

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Corporate Finance & Securities

Founders, Stock, and Dilution

Successful Founders Get Diluted.

We often get asked by founders what they can do to protect against dilution. A few answers:

You can build a crap company nobody wants to invest in. You can build a cool company that doesn’t need to scale. You can pour your own money into the venture, if you have enough of it. You can scale at a slow pace. You might be able to get a loan instead of raising money through selling an interest in your company.

There are some small protections against dilution that your attorneys can fashion for you. But the reality of life for most founders of ventures designed to scale is that dilution is a normal part of success. Many founders are strongly opposed to dilution,...

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Business Startup

Contingent Contracts: a Valuable Tool When Negotiating Agreements

When you are negotiating an agreement, there are all sorts of ways contract discussions can break down. Often when negotiations become difficult, a contingent contract is a compromise that can lead to a mutually beneficial resolution.

What Is a Contingent Contract?

A contingent contract is an agreement in which the parties to the contract agree to different obligations depending on a future event. A common example is a non-discretionary performance bonus for an employee or manager. A simple provision awarding a non-discretionary bonus might look something like:

If Company Sells X number of units or more of Product Y in 2014, Employee will receive an additional $100,000 in compensation, payable on March 1st, 2015.

In this example, the Company agrees to provide the Employee...

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