Convertible Note Cheat Sheet

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​important​ When negotiating a convertible note financing, focus on the following elements of the term sheet:

• What is the valuation cap?

• What is the conversion discount? (10% to 20% typically.)

• What is the repayment premium in the event of a sale before conversion?

• What defines the qualified financing?

• What happens if the company does not achieve a qualified financing?

• Do you have the right to participate in any financings which are not qualified financings?

• Is there an optional conversion provision that is at your option, or the company’s option?

• Do you have or want a most-favored nations clause?

• Will interest be paid in cash or stock or a combination of cash and stock? (Although this is less common, if you are being paid a considerable amount in interest because you are making a sizable investment, this is something you could ask for.)

​danger​ Provisions to watch out for in a convertible note financing:

• Make sure that in the event of the sale of the company the company can’t just return your principal and interest. You are investing in a note for the potential equity upside, not interest.

• You will usually want a valuation cap that is acceptable to you (not too high).

• A mandatory conversion paragraph that doesn’t convert you at the lower of the discounted price or cap.

• The lack of a change of control payment provision.

• A mandatory conversion paragraph that does not contain a sufficiently sized round to justify your forced conversion.

• The lack of an optional conversation paragraph, giving you the option to convert into equity either (i) when the company closes a financing round that does not meet the definition of a qualified financing, or (ii) after the maturity date, at a specified valuation (for example, the cap).