Big News: FounderDating is joining OneVest to build the largest community for entrepreneurs. Details here
Latest Notifications
You have no recent recommendations.
Name
Title
 
MiniBio
FOLLOW
Title
 Followers
FOLLOW TOPIC

Question goes here

1,300 Followers

  • Name
    Entrepreneur
  • Name
    Entrepreneur
  • Name
    Entrepreneur
  • Name
    Entrepreneur
  • Name
    Entrepreneur
  • Name
    Entrepreneur
  • Name
    Entrepreneur
  • Name
    Entrepreneur

Convertible Note: Same terms for everyone?

I was just wondering if anyone raising money using a Convertible Note has had a prospective investors ask for changes to the terms of the note, and how they handled it? Generally speaking it is easier to have everyone with the same terms, but I had a request for an increase in the discount rate if for some reason the qualified funding wasn't achieved by the maturity date.

19 Replies

Michael Brill
0
0
Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
Everyone should get the same terms. Is this a problem?
Steve Simitzis
4
0
Steve Simitzis Advisor
Founder and CEO at Treat
Looks like the problem is, everyone has the same terms, but now one person wants their own terms. Then what?

You could drop the investor, but let's say you need their money. What options do you have? Do you need to go and renegotiate with everyone else?

(Brendan, hopefully this captures your question)
Michael Brill
6
0
Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
Most investors are not going to complain if you go back and give them stuff. Having said that, it's work.

Would definitely try to use the others as social proof that the term isn't required and exaggerate the amount of work to "renegotiate" with confirmed investors (btw, you're not renegotiating... the next time you send out an email, just drop a note that they're getting this bonus term - it's kind of a shrug anyway). If new investor still needs it and you still need investor then, depending on your circumstances, I'd point out that there are valid reasons why you'd want to defer an equity round such as you generating enough revenue to defer for higher valuation - should you be penalized for that? "It's important that my investors and I are completely aligned, etc." If that's a reasonable scenario then that should be enough. Even better when delivered with third party validation ("I was talking to an investor that has done a trillion deals and he said he didn't like the variable kicker because he's seen founders push for an earlier financing at worse terms just to avoid this extra dilution."). Less experienced investors tend to put more crap in and often need more experienced investors' wisdom to let it go.

The reality is that if you're 12-18 months down the road, you're running out of money and you're not able to raise money, then you'll need your existing investors to carry you. At that point it's a new deal anyway, so the extra 5% - 10% penalty for missing your funding timeline is completely immaterial. So if you can't move the investor off the term, then take the money, drop in a sentence in a future email to current investors and get back to work.

Brendan Benzing
0
0
Brendan Benzing Advisor
Cofounder at MyNeighbor
Michael (Steve thanks for clarifying)

You have captured the issues perfectly! Thanks. Your feedback around the realities of where we likely could be for this issue to be an issue was my thinking exactly, does it really matter?. In fact, it actually could be to my benefit to negotiate now, rather than in the future, when I could be in a weaker position.

Also your point around not being aligned I think makes a lot of sense, because a material change in terms around the discount rate and timing of the funding may actually motivate us to take a worse deal at that time, something I think the investors wouldn't want either.
Perri Blake Gorman
1
0
Founder of Archively & UnrollMe
Hey Brendan - I agree with what is being said too. First, everyone should definitely be on the same terms. Second what he is asked for doesn't make any sense to me. On what basis should he get a greater discount because it took longer to get to a priced round? That kind of mentality sounds like a red flag to me.

My advice is if you don't know this investor well and you don't need him move on. I wouldn't want an investor like that. Is he a big part of your round?
Michael Brill
1
0
Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
I don't think it's an unreasonable ask... and not anywhere close enough in my book to reject them. I think the basic argument is that the discount is a function of time. Let's say that the note actually allows the company to grow and defer equity financing and that in turn raises the valuation which in turn raises the price to the note issuer. The longer it takes, the more it costs - so I should get a greater discount. The logic isn't that wacky... especially if there's no cap.

Having said that, I imagine 99% of the time a company doesn't raise a round has to do with inability rather than choice... and in those cases this term isn't going to matter much.
Rob Gropper
2
0
Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
1. In general i would remind the investor that it is in everyone's best interest to be sure you and your team are rewarded to succeed, not beaten to a pulp at every turn. 2. If you and your team don't get traction and attract follow-on investment (a priced round) an additional discount isn't going to get his/her investment back and you are going to end up renegotiating the note anyway. 3. dig deeper with the investor to clearly understand what's behind his/her objection/request - selling/negotiation 101- understand the real reason behind the request/objection before offering a solution. Try to configure a solution that aligns investor incentives with yours - where your team and investors get rewarded for hitting goals rather than you getting penalized and investors rewarded for missing them.
Steve Simitzis
0
0
Steve Simitzis Advisor
Founder and CEO at Treat
Rob, that's an excellent answer. Can you dig into (2) a bit? Why would you end up renegotiating the note?
Rob Gropper
0
0
Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
@ Steve S, assuming the note has a fixed term, when the term is up if the priced round has not closed the note holders will weigh their options and either walk (with whatever collateral they might have) or if they see promise, re-up under new terms. One of the downsides of convertible notes is the ticking clock.
Rob Gropper
0
0
Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
Here's an ingesting read on convertible notes:

http://www.bothsidesofthetable.com/2014/09/17/bad-notes-on-venture-capital/

Join FounderDating to participate in the discussion
Nothing gets posted to LinkedIn and your information will not be shared.

Just a few more details please.

DO: Start a discussion, share a resource, or ask a question related to entrepreneurship.
DON'T: Post about prohibited topics such as recruiting, cofounder wanted, check out my product
or feedback on the FD site (you can send this to us directly info@founderdating.com).
See the Community Code of Conduct for more details.

Title

Give your question or discussion topic a great title, make it catchy and succinct.

Details

Make sure what you're about to say is specific and relevant - you'll get better responses.

Topics

Tag your discussion so you get more relevant responses.

Question goes here

1,300 Followers

  • Name
    Details
  • Name
    Details
  • Name
    Details
  • Name
    Details
  • Name
    Details
  • Name
    Details
  • Name
    Details
  • Name
    Details
Know someone who should answer this question? Enter their email below
Stay current and follow these discussion topics?