Convertible Loan Note: Guidance for Startup Founders

Description
(This post was originally published at sosv.com)

On a yearly basis, SOSV invests into 200 companies whose investments vary greatly, given the differences in location, stage of investment, the amount of needed capital, and other related key factors.

However, a very common way for early stage companies to raise finance is via convertible debt- a prevalent format in the US.

(A discussion on debt and CLN is available on the methodology below.)

I regularly come across many of these instruments, all with different characteristics and clauses that may either be suited to the company or the investors themselves.

Here at SOSV, we developed a new type of CLN called “SAFER”. It includes a “trigger”- A trigger is a situation where the company has a CLN financing round and raises a surplus of money, where the round then automatically becomes a “priced round”- ie. An equity financing instead of debt.

The advantage of this is that the price per share will be secured for the firm, in turn providing certainty to the founders on the impact of dilution given the capital raised.

It is suggested that founders consider such an approach if they need considerable amounts of capital.

Generally is a word you will come across a lot on the methodology. This is given that each CLN needs to be adapted to properly portray the agreed-upon terms of the financing- a “one size fits all” format could be detrimental for founders in the long run!

You may download the SOSV accelerator Program standard CLN, as well as the available methodology, below.

Do keep in mind that this Word file will only provide an overview of the headline terms of the CLN. The file is for guidance purposes, thus we recommend founders to obtain their own independent legal advice for their CLN round.

-Maria O'Brien of SOSV