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Who should use a Convertible Note? How does it work?
A convertible note is a loan that converts into equity after the company has a bit more operating history under its belt and there is more information available to establish a fair price.
Startups in Silicon Valley typically use a SAFE. However, a convertible note might be a better option for startups located in other areas of the country with more traditional investors.
If you raise on Wefunder, you can upload your own convertible note, or use our convertible note created by CooleyGo.
Our CooleyGo Convertible Note chose the options that were most founder-friendly:
- When calculating the denominator for the converting securities, the option pool is not included (this matches the YC SAFE form)
- If a qualified financing has not closed by maturity date, there is no auto-convert provision
- Qualified financing does not need to convert on/prior Maturity Date;
- Notes may convert into a shadow series;
- Noteholders do not receive premium in connection with a change in control transactions; and
- Noteholders do not have a right to convert to common.
The following terms are customizable:
- Valuation Cap. The Valuation Cap is the most important term. It entitles investors to equity priced at the lower of the valuation cap or the pre-money valuation in the subsequent financing. Typical Valuation Caps for early-stage startups currently range from $4 million to $20 million.
- Discount Rate. The default is 0%. This term gives investors a discount on the price of stock, when the pre-money valuation is less than your valuation cap. Typical discounts range from 0% to 10%.
- Interest Rate. The default is 3%.
- Maturity Date. The date the note is due.
- Governing Law. We default to Delaware, but you may change to any state.
- Most Favored Nation (MFN) provision. The default is false. However, if you add this provision, investors will match the terms of any better terms you may offer other non-Wefunder investors.